Question

Why did LBO activity increase in the early 1980s and after 1992? What corrections were made after 1992?

Answer 1

LBO is simply purchase of a firm by an outside individual, another firm or incumbent management with the purchase being financed by large amounts of debt.

According to data, LBO transactions increased from 16 in 1979 to 125 in 1988. This largely was the result of a single investment banking firm, Drexel Burham Lambert, and the efforts of one of its principals, Micheal Millken. It was he who determined that high-yield bonds(junk bonds / high risk) would be enticing to investors who otherwise might not be willing to take equity positions in such risky firms. Drexel developed a market for such junk bonds, serving as investment banker for those interested in taking over existing corporations. Market flourished for several years before Milken was convicted of security violations.

LBO deals diminished in the 1990's but began to heat up again in the new century in the mid 2000's.