A leveraged buyout (LBO) is when a company ... is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the money borrowed to purchase the target-company/asset. Since the debt ... has a lower cost of capital ... than the equity, the returns on the equity increase as the amount of borrowed money does until the perfect capital structure is reached.
In other words, you load up debt on the company that you're acquiring with the hopes that the amount you're going to make running that company is going to be more than the amount it's costing you to service the debt.
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From http://en.wikipedia.org/wiki/Leveraged_buyout:
A leveraged buyout (LBO) is when a company ... is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the money borrowed to purchase the target-company/asset. Since the debt ... has a lower cost of capital ... than the equity, the returns on the equity increase as the amount of borrowed money does until the perfect capital structure is reached.
In other words, you load up debt on the company that you're acquiring with the hopes that the amount you're going to make running that company is going to be more than the amount it's costing you to service the debt.