Berkshire Partners - Case Solution

1. What are LBOs, and why do they exist?

A leveraged buyout is the acquisition of another company financed using a significant amount of borrowed money to meet the cost of acquisition. The contribution of equity is usually relatively small.

Often, the assets of the company being bought are used as collateral for the borrowed money in addition to the assets of the acquiring company.

Even though LBOs are associated with high risk because the acquired company’s cash flow might be inadequate to protect themselves from insolvency, they can generate significant returns for both sellers and buyers.

If the company is public, shareholders can earn substantial premiums over the market value of the shares they own.

2. Does Berkshire Partners create economic value?

By taking over other companies, Berkshire Partners, at the same time, introduces changes in capital structures, management incentives through free stock options, and especially corporate governance.

This provides an environment conducive to long-term growth and profitability for its portfolio companies, so BP does create economic value in numerous ways.

On the other hand, the high debt levels involved in LBOs impose a high risk of becoming insolvent. However, in this regard, one has to mention that by actively monitoring their portfolio companies carefully, BP managed to fully realize the great majority of investments made.

3. How does BP add value to its businesses?

BP analyzes the target company’s operations, facilities, management, industry and competitive and regulatory environment. BP adds value to its companies by…