The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries

Assoumou Menye Oscar; Djefedie Stéphane Contard

doi:doi:10.11648/j.jfa.20231104.17

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The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries

Assoumou Menye Oscar, Djefedie Stéphane Contard

Published in Journal of Finance and Accounting (Volume 11, Issue 4)

Received: 5 July 2023 Accepted: 21 July 2023 Published: 31 July 2023

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Abstract

Leveraged buyouts (LBOs) are a financial arrangement that allows the acquisition of a company by taking on debt. To implement the LBO, a passive holding company must first be created whose sole corporate purpose is to hold equity stakes in operational SMEs. An active holding company, on the other hand, manages a portfolio of equity stakes, but also actively participates in setting group policy and overseeing its subsidiaries. LBOs stand for Leveraged Buyouts, meaning a buyout with leverage. This acquisition is made through a bank loan or by issuing bonds. At the end of the bond term, the acquired company is generally listed on the stock exchange in order to generate capital gains for all investors. Ultimately, the holding company did not commit its own funds and managed to pay off the bank financing thanks to dividends. Indeed, to ensure the success of an LBO operation, it is essential to audit the target company and verify its ability to generate profits to distribute dividends that will allow the holding company to pay off its debts. LBOs experienced remarkable growth in the United States in the early 1970s, in Europe in the 1980s, and in Africa since the 2000s. These operations, which can take various forms (leveraged buyouts, debt-financed acquisitions, acquisition through borrowing, takeover through borrowing), are financial techniques for buying companies that allow investors to acquire companies while minimizing acquisition costs and maximizing their financial returns. This article, through a simulation process, tries to show how LBOs can boost and stimulate the development and integration of African countries. These operations are becoming increasingly useful or even essential for African companies whose size has proven to be a distorting factor in their development, not to mention the consequences of the recent emergence of COVID-19. Ultimately, we propose LBOs as a real panacea to strengthen the growth, development and pooling of forces of African companies.

Published in	Journal of Finance and Accounting (Volume 11, Issue 4)
DOI	10.11648/j.jfa.20231104.17
Page(s)	124-133
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Leverage Buy-out, Leverage Effect, Holding Company, Mezzanine Loan, Senior Loan

References

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[2]	Allen & Overy Global Counsel “Private equity in Africa Context, opportunities, and risks”, avril 2015.
[3]	Allen and Overy, “Value of Africa PE funds, PE transactions by year ($bn)”, avril 2015.
[4]	Arditti F. et Levy H., “The Weighted Average Cost of Capital As a Cutoff Rate: A Critical Analysis Of The Classical Textbook Average” Financial Management, vol. 6, n° 3, 1977, pp. 24-34.
[5]	Barreau J. and Delahaye J., Financial management, Manual and applications, DECF, 12th ed., Dunod, 2003, p. 159.
[6]	David Thesmar, Quentin Boucly et David Sraer, “Job Creating LBOs”, The Journal of Financial Economics, 1^er février 2013.
[7]	Durand D., “Costs Of Debt And Equity Funds For Business: Trends and Problems of Measurement”, Conference on Research in Business Finance, National Bureau of Economic Research, New York, 1952, pp 215-247.
[8]	Forum Investir en Afrique organisé par la Banque Mondiale à Addis Abebas en juillet 2015.
[9]	Freshfields Bruckhaus Deringer, “Into Africa: the rise of private equity in Africa”, octobre 2014.
[10]	Jarrel G., Brickley J. et Netter J., “The Market of Corporate Control: The Empirical Evidence Since 1980”, Journal of Economic Perspectives, 1988.
[11]	Jeune Afrique, “Lionel Zinsou: La France se trompe sur la vitesse du mouvement en Afrique” juin 2015.
[12]	Jeune Afrique, “Private Equity en Afrique: mais qu’attendent les Français?” janvier 2013.
[13]	Kaplan S., “Sources Of Value In Management Buy Out”, in Leveraged Management Buyout: Causes and Consequences, Y. Amihud (ed.), Homewood, Dow Jones-Irwin, 1989, pp. 611-632.
[14]	McKinsey “Uncovering hidden investment opportunities in Africa”, février 2014.
[15]	Michel Albouy, “Structure financière et coût du capital”, Encyclopédie de Gestion (sous la direction de Patrick JOFFRE et Yves SIMON), Economica, tome 3, 1989 p. 2766.
[16]	Michel Albouy, Finance: investissement, financement, acquisitions, Economica, 3^e édition, 2010.
[17]	Smith AJ., “Capital Owenership Structure And Performance: The Case Of Management Buyouts”, Journal of Financial Economics, 15, 1986.
[18]	Summers L., “Discussion in LBO Conference”, Journal Of Applied Corporate Finance, 1990.
[19]	The African Development Bank “The Middle of the Pyramid: Dynamics of the Middle Class in Africa”, avril 2011.
[20]	The Boston Consulting Group, “Africa Blazes a Trail in Mobile Money”, février 2015.

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APA Style

Assoumou Menye Oscar, Djefedie Stéphane Contard. (2023). The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries. Journal of Finance and Accounting, 11(4), 124-133. https://doi.org/10.11648/j.jfa.20231104.17

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ACS Style

Assoumou Menye Oscar; Djefedie Stéphane Contard. The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries. J. Finance Account. 2023, 11(4), 124-133. doi: 10.11648/j.jfa.20231104.17

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Assoumou Menye Oscar, Djefedie Stéphane Contard. The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries. J Finance Account. 2023;11(4):124-133. doi: 10.11648/j.jfa.20231104.17

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@article{10.11648/j.jfa.20231104.17,
  author = {Assoumou Menye Oscar and Djefedie Stéphane Contard},
  title = {The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries},
  journal = {Journal of Finance and Accounting},
  volume = {11},
  number = {4},
  pages = {124-133},
  doi = {10.11648/j.jfa.20231104.17},
  url = {https://doi.org/10.11648/j.jfa.20231104.17},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20231104.17},
  abstract = {Leveraged buyouts (LBOs) are a financial arrangement that allows the acquisition of a company by taking on debt. To implement the LBO, a passive holding company must first be created whose sole corporate purpose is to hold equity stakes in operational SMEs. An active holding company, on the other hand, manages a portfolio of equity stakes, but also actively participates in setting group policy and overseeing its subsidiaries. LBOs stand for Leveraged Buyouts, meaning a buyout with leverage. This acquisition is made through a bank loan or by issuing bonds. At the end of the bond term, the acquired company is generally listed on the stock exchange in order to generate capital gains for all investors. Ultimately, the holding company did not commit its own funds and managed to pay off the bank financing thanks to dividends. Indeed, to ensure the success of an LBO operation, it is essential to audit the target company and verify its ability to generate profits to distribute dividends that will allow the holding company to pay off its debts. LBOs experienced remarkable growth in the United States in the early 1970s, in Europe in the 1980s, and in Africa since the 2000s. These operations, which can take various forms (leveraged buyouts, debt-financed acquisitions, acquisition through borrowing, takeover through borrowing), are financial techniques for buying companies that allow investors to acquire companies while minimizing acquisition costs and maximizing their financial returns. This article, through a simulation process, tries to show how LBOs can boost and stimulate the development and integration of African countries. These operations are becoming increasingly useful or even essential for African companies whose size has proven to be a distorting factor in their development, not to mention the consequences of the recent emergence of COVID-19. Ultimately, we propose LBOs as a real panacea to strengthen the growth, development and pooling of forces of African companies.},
 year = {2023}
}

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TY - JOUR
T1 - The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries
AU - Assoumou Menye Oscar
AU - Djefedie Stéphane Contard
Y1 - 2023/07/31
PY - 2023
N1 - https://doi.org/10.11648/j.jfa.20231104.17
DO - 10.11648/j.jfa.20231104.17
T2 - Journal of Finance and Accounting
JF - Journal of Finance and Accounting
JO - Journal of Finance and Accounting
SP - 124
EP - 133
PB - Science Publishing Group
SN - 2330-7323
UR - https://doi.org/10.11648/j.jfa.20231104.17
AB - Leveraged buyouts (LBOs) are a financial arrangement that allows the acquisition of a company by taking on debt. To implement the LBO, a passive holding company must first be created whose sole corporate purpose is to hold equity stakes in operational SMEs. An active holding company, on the other hand, manages a portfolio of equity stakes, but also actively participates in setting group policy and overseeing its subsidiaries. LBOs stand for Leveraged Buyouts, meaning a buyout with leverage. This acquisition is made through a bank loan or by issuing bonds. At the end of the bond term, the acquired company is generally listed on the stock exchange in order to generate capital gains for all investors. Ultimately, the holding company did not commit its own funds and managed to pay off the bank financing thanks to dividends. Indeed, to ensure the success of an LBO operation, it is essential to audit the target company and verify its ability to generate profits to distribute dividends that will allow the holding company to pay off its debts. LBOs experienced remarkable growth in the United States in the early 1970s, in Europe in the 1980s, and in Africa since the 2000s. These operations, which can take various forms (leveraged buyouts, debt-financed acquisitions, acquisition through borrowing, takeover through borrowing), are financial techniques for buying companies that allow investors to acquire companies while minimizing acquisition costs and maximizing their financial returns. This article, through a simulation process, tries to show how LBOs can boost and stimulate the development and integration of African countries. These operations are becoming increasingly useful or even essential for African companies whose size has proven to be a distorting factor in their development, not to mention the consequences of the recent emergence of COVID-19. Ultimately, we propose LBOs as a real panacea to strengthen the growth, development and pooling of forces of African companies.
VL - 11
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Author Information

Assoumou Menye Oscar

Advanced School of Economics and Commerce, University of Douala, Douala, Cameroon
Djefedie Stéphane Contard

Advanced School of Economics and Commerce, University of Douala, Douala, Cameroon

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APA Style

Assoumou Menye Oscar, Djefedie Stéphane Contard. (2023). The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries. Journal of Finance and Accounting, 11(4), 124-133. https://doi.org/10.11648/j.jfa.20231104.17

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ACS Style

Assoumou Menye Oscar; Djefedie Stéphane Contard. The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries. J. Finance Account. 2023, 11(4), 124-133. doi: 10.11648/j.jfa.20231104.17

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AMA Style

Assoumou Menye Oscar, Djefedie Stéphane Contard. The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries. J Finance Account. 2023;11(4):124-133. doi: 10.11648/j.jfa.20231104.17

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@article{10.11648/j.jfa.20231104.17,
  author = {Assoumou Menye Oscar and Djefedie Stéphane Contard},
  title = {The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries},
  journal = {Journal of Finance and Accounting},
  volume = {11},
  number = {4},
  pages = {124-133},
  doi = {10.11648/j.jfa.20231104.17},
  url = {https://doi.org/10.11648/j.jfa.20231104.17},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20231104.17},
  abstract = {Leveraged buyouts (LBOs) are a financial arrangement that allows the acquisition of a company by taking on debt. To implement the LBO, a passive holding company must first be created whose sole corporate purpose is to hold equity stakes in operational SMEs. An active holding company, on the other hand, manages a portfolio of equity stakes, but also actively participates in setting group policy and overseeing its subsidiaries. LBOs stand for Leveraged Buyouts, meaning a buyout with leverage. This acquisition is made through a bank loan or by issuing bonds. At the end of the bond term, the acquired company is generally listed on the stock exchange in order to generate capital gains for all investors. Ultimately, the holding company did not commit its own funds and managed to pay off the bank financing thanks to dividends. Indeed, to ensure the success of an LBO operation, it is essential to audit the target company and verify its ability to generate profits to distribute dividends that will allow the holding company to pay off its debts. LBOs experienced remarkable growth in the United States in the early 1970s, in Europe in the 1980s, and in Africa since the 2000s. These operations, which can take various forms (leveraged buyouts, debt-financed acquisitions, acquisition through borrowing, takeover through borrowing), are financial techniques for buying companies that allow investors to acquire companies while minimizing acquisition costs and maximizing their financial returns. This article, through a simulation process, tries to show how LBOs can boost and stimulate the development and integration of African countries. These operations are becoming increasingly useful or even essential for African companies whose size has proven to be a distorting factor in their development, not to mention the consequences of the recent emergence of COVID-19. Ultimately, we propose LBOs as a real panacea to strengthen the growth, development and pooling of forces of African companies.},
 year = {2023}
}

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