When we last checked in with Leonard Shaykin, he was the head of Citicorp Venture Capital Ltd.'s leveraged buyout (LBO) unit and an enthusiastic proponent of the leveraged buyout deal. ("Going Private," February). Well, Shaykin, 39, was apparently overwhelmed by his own logic. In February, he left Citicorp and formed a partnership with venture capitalist Fred Adler, celebrated for his role in the founding of such companies as Data General, Sci-Tex, and Lexidata. Adler & Shaykin of New York will deal exclusively in LBOs.
The LBO, as you may recall, is a technique whereby investors acquire a company using a substantial amount of debt financing relative to equity invested. Investors generally obtain the financing by putting up the company's assets as collateral, and by repaying the loan out of the company's cush flow. As we reported in February, division managers of major corporations have been using the LBO technique to "go private." That is, the manager, or group of managers, will acquire the division and establish it as a separate, privately owned company. Such deals are often known as "management buybacks," or management LBOs; the trend has been dubbed "deconglomeratization."
Shaykin helped to popularize the use of the LBO technique. He had joined Citicorp Venture Capital four years ago and had overseen its move into leveraged buyouts. During his tenure, the company established a $100 million fund for LBOs. By the time Shaykin left, about $40 million of that amount had been used to finance 16 buyouts. Now Shaykin and Adler are raising a $50 million pool to do LBOs on their own. "It seemed like a natural," says Shaykin.
Meanwhile, management LBOs in particular are increasing in popularity. "More and more managements are becoming educated to the buyout as an alternative strategy," says David Thomas, who remains with Citicorp's buyout unit, at least for the moment. He believes that this new awareness has come as a result of the recent rash of LBOs involving public companies. "Banks and lending institutions had been aware of the leveraged buyout for a long time, but it wasn't until there were sales involving disclosure that most businessmen began to hear about them."
W.T. Grimm & Co., a Chicago-based merger broker that tracks LBOs, confirms that the number of management buyouts is still on the rise. Tomi Simic, research director for Grimm, notes that, in 1978, 6% of all divestitures (49 of 820) involved management LBO sales. By 1982, the proportion had more than doubled, to 13% of all divestitures (115 out of 875). The size of the deals grew even more, from an average of $3.8 million in 1978 to a whopping $50.6 million last year.
"The increased acceptance and understanding of leveraged deals has really helped the growing trend in management buyouts," observes Simic. Which suggests that the trend is likely to continue