It opens the door for borrowers, allowing them to borrow millions of dollars to buy projects that were originally reluctant (previously impossible). At the beginning of the development of 1980 leveraged buyout, the cumulative transaction amount of the four M&A projects considered as the basis of leveraged buyout reached1700 million US dollars. 1988 is the peak of the development of leveraged buyouts, when the cumulative transaction volume has reached188 billion US dollars. These transactions, which are completed by borrowing a lot, will inevitably bring great risks, that is, those "junk stocks" with extremely high interest rates. These so-called junk stocks are extremely risky because they often attract shareholders with high interest rates, but there is no support behind them. Therefore, it is not surprising that some projects in the 1980s eventually turned into disasters and the borrowers went bankrupt. Although the early leveraged buyout market created value through huge shareholder income and improvement of operational efficiency, the situation deteriorated in the late 1980s. 1989 in the first eight months, junk bonds worth $4 billion were postponed. The first sign of the crisis was that the retail kingdom of Canadian entrepreneur Robert Campeau had financial difficulties in September. 1989. His failure to pay due interest led to leverage, and the average share price of the company showed an abnormal return of 2 percentage points in three days (market fluctuation adjustment return). The basis of junk bonds rose from 500 basis points to 700 basis points, and the funds flowing into junk bond mutual funds fell sharply. A month later, the second signal appeared. Citibank and Chase Bank failed to provide United Airlines CEO Stephen Wolf with the $7.2 billion loan needed for the company's privatization. The news that the loan could not be taken out shocked the whole stock market, and risk arbitrageurs threw out their stocks one after another.
Bad news soon followed: many managers of large American companies applied for Chapter 1 1 bankruptcy protection. 1990, the total number of bankrupt companies with debts above 1 billion dollars reached 24, and the total liabilities of these companies exceeded 27 billion dollars. 199 1 year, the number of large-scale bankruptcies rose to 3 1 year, although the total liabilities decreased to $2 1 billion. During the period of 1992, the number of large bankruptcy cases decreased significantly, but the amount of liabilities involved only decreased slightly. The shrinkage of the leveraged buyout market is so amazing that people predict that leveraged buyouts and junk bonds will become extinct. In 1980s and 1990s, American companies fully returned to the equity market. The reasons for this include seizing the opportunity of stock market recovery from recession and reducing leverage ratio to reduce the heavy debt burden of the company. 199 1 year leveraged buyout has fallen behind the trend of the times, and it only recovered moderately after five years.
Since 1996, the acquisition business has been widely concerned. According to M&A magazine (1997), the total transaction amount increased from $6.5 billion in 1995 to $24.2 billion. This is smaller than the amount at the peak of leveraged buyout in the late 1980s, but it is roughly equivalent to the levels of 1984 and 1985. This growth can be partly attributed to the incredibly strong M&A market of 1996, when the chief executives were focusing on strategic acquisitions and divesting non-core businesses. A total of 65,438+00,000 M&A transactions, with a total amount of 657.4 billion US dollars, eclipsed the previous year's records of 9,000 M&A transactions and 522.4 billion US dollars.
Another factor that led to the recovery of leveraged buyouts in the mid-1990s was the unprecedented huge capital inflow into buyout funds by institutional investors, pension funds and wealthy investors. According to the report of acquisition magazine (1996), the acquisition fund almost increased by15.8 billion USD in the first nine months of 1996. In the third quarter of 1996, the newly-increased capital of the acquisition fund reached US$ 8.3 billion, exceeding the total newly-increased capital of 1993.
1996, the leveraged buyout fund achieved a successful recovery, obtained a lot of new funds from investors, and returned to the market with a friendly image of supporting capital providers rather than a cold and hostile attacker. That year, the number of leveraged buyout institutions grew at the fastest rate since the late 1980s.
However, leveraged buyout transactions in the 1990s were very different from those in the 1980s. In 1990s, leveraged buyout was carried out under the background of decreasing the number of ideal target companies, intensifying competition, lowering the leverage level of capital structure, changing the source of value creation and sharply decreasing the average return of the industry.