A leveraged buyout is buying a company mostly with borrowed money. Typically, the buyer puts up 30-40% equity and borrows 60-70% of the purchase price. The acquired company's own assets and future cash flows serve as collateral for the debt. It is like buying a house with a mortgage — except the "house" is a corporation.
The largest LBO in history: KKR's $44 billion takeover of RJR Nabisco in 1988 (immortalized in the book "Barbarians at the Gate"). More recently, Elon Musk's $44 billion acquisition of Twitter (2022) was partially funded with $13 billion in debt — a modern LBO. Dell's $67 billion take-private deal in 2013 was another landmark.
The LBO model: buy a company with stable cash flows, use those cash flows to pay down the debt over 5-7 years, improve operations, and sell at a higher price. The returns can be spectacular — a PE firm might turn $1 billion in equity into $4 billion. But if the acquired company's cash flows decline, the heavy debt can lead to bankruptcy.