The process of a Leveraged Buyout (LBO), involves the acquisition of a company by using a small portion of equity and a large portion of debt financing. While, the concept of LBO is well accepted globally, domestic buyout of one Indian company by another is not favored due to various reasons. This article explains the concept and advantages of an LBO and identifies the reasons that make execution of LBOs difficult in the current environment.

Mergers and Acquisitions (M&A) have been on the rise in India. A large number of M&A have been witnessed in sectors like finance, telecom, FMCG, construction, automotives and metals. According to the World Investment Report (WIR), 2005 published by the United Nations Conference on Trade and Development (UNCTAD), India is the third most prominent research and development center in the world. India is also the biggest foreign investor in the UK, overshadowing even the US.

Industries like metal, energy, pharmaceuticals, IT and banking attract large amounts of Indian investments. The reasons that are driving M&A include: opportunity to access new markets, preserving growth momentum, attaining visibility and developing into international brands, buying and owning progressive technology instead of importing, developing new product mixes, improving operating efficiencies and margins, and taking up the global competition. UNCTAD's, WIR 2006 identified four factors that compel developing nations to go global. First, globalization helps in exploring new markets. Indian multinational corporations looking for niche markets gain significantly through outbound investments. Second, rising labor costs at home push MNCs abroad. Third, competitive pressures in the domestic economy compel MNCs to invest abroad. Fourth, liberalization policy of the government stimulates outbound investments.

M&A are usually financed by equity and/or cash. It needs to be recognized that debt financing is more effective than equity or cash financing as it provides the advantage of `trading on equity'. However, India is lagging behind in comparison to the other nations in respect of debt financing due to the underdeveloped debt market and lack of high-yield bonds in India. Although the corporate debt market has been in existence in India for a long time, 80% of the primary market for debt issuance is under the control of the state- owned public sector undertakings.

With regard to debt financing in India, commercial banks are the most important players in the capital markets. In the past, Indian commercial banks have lent money to the Indian companies for the acquisition of the government-owned companies slated for privatization. These transactions have been largely of the nature of balance sheet financing.

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