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Cash flows of firms improve following leveraged buyouts (LBOs). What are the explanations for these improvements?

Cash flows of firms improve following leveraged buyouts (LBOs). What are the explanations for these improvements?

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Answer #1

The explanations for these improvements are as follows-

1. Productivity gains- The firm improves its productivity because they now have funds to improve it. Hence, this increase in productivity causes cash flows to increase.

2. Another reason is that LBOs are performed on companies whose prospects of improving are more. Hence, if the private equity firm doesn't have confidence over the future of the company, they wouldn't perform LBO on it.

3. The incentives of these firms also increase to improve cash flows because they have the burden of high debt repayment on them. If they don't end up increasing their performance, it can end up with the firm going bankrupt. They try to accelerate cash flows sometimes at the expense of long-run cash flows so that the firm can survive.

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