What is a leveraged buyout (LBO)?

A leveraged buyout (LBO) is defined as a transaction where a company is acquired predominantly using a significant amount of borrowed funds. In this type of acquisition, the buyer typically uses debt financing to cover the majority of the purchase price, while the company's assets and cash flows are often used as collateral for the loans. This method allows the acquirer to make a sizable purchase with a relatively small amount of equity investment.

The use of debt in an LBO can amplify returns on investment, as the acquirer only has to contribute a fraction of the total purchase price, relying on the expected performance of the acquired company to service the debt. The goal is to achieve a profitable exit, often through either a resale of the company or an initial public offering (IPO), after improving the operations and financials of the acquired company.

The other options describe scenarios that do not involve the use of significant debt to finance the acquisition, which is a defining characteristic of a leveraged buyout; hence, they do not accurately capture the essence of an LBO.