Leveraged Buyouts: Implications for Economic Development Analysis

Considering the number of leveraged buyouts (LBOs) that have occurred during the past 10 years, economic development planners should think about the potential impact on the employment base of their communities from these debt-heavy transactions. This article summarizes briefly the background of LBOs, pointing out that today in excess of probably $300 billion is outstanding in bank loans and junk bonds tied to these transactions. Government tax and antitrust policies facilitated these deals, as did the willingness of financial markets to accommodate higher levels of debt. The experiences of Goodyear Tire & Rubber, Owens-Corning Fiberglass, and Fruehauf Corporation show how management shifted to cash flow maximization for debt reduction, selling off businesses and closing plants in the process. The result was a substantial reduction in employment for each company. The implication is that economic development planners should do contingency planning in anticipation of the impact from leveraged companies, both in and outside the local area. The opportunity exists to survey the potential damage and take proactive steps before the effect is felt.