It was a great romance, while it lasted: Wall Street and the leveraged buyout. Now the two are giving birth to their own mini-phenomenon. According to investment banker Glenn Golenberg, "son of LBO" is on its way.
Like many of his colleagues, Golenberg has been deluged with LBO proposals in recent years. Most have been overpriced, undercapitalized, or generally ill-conceived, he says. In an LBO, a management group puts up a small amount of money, using the company's future earnings and assets as collateral to borrow funds to buy the company. One of the biggest LBOs was the buyout of City Investing Co. for around $1.3 billion. "The euphoria of the phenomenon in the past few years caused banks to lend too much money," says Golenberg. "A lot of unqualified people were getting deals done, and now the companies aren't performing as well as expected."
Saddled with debt, many such companies will raise cash by spinning off a unit through another LBO, Golenberg predicts. "We're finding a lot of LBOs that want to talk about selling divisions," he says. "It will become a very significant niche" -- one that he hopes his new limited partnership, Golenberg Capital Associates, will occupy. "There is an active, but quiet, market for it," concurs Leigh Trevor, a partner in Jones, Day, Reavis & Pogue, a law firm specializing in LBOs. Trevor says that certain LBOs are "engaging in partial liquidations in order to pay for the debt they've incurred."
But not all observers think that "son of LBO" will grow much once it is out of the delivery room. "It's really a small fraction of the market," says Victor A. Ptak, a partner in J.C. Bradford & Co., a Nashvillebased investment banking firm. "Very few investment bankers have the talent, time, and temperament to do it."