No . 7 Leveraged Buyouts in Poland

The dynamic transformation of the Polish economy from a centrally planned to market economy is by now well advanced. The transformation has also contributed to a rapid development of the capital market. However, the leveraged buyout market has hardly been developed yet. The leveraged buyout technique allows investors to take companies over with little of their own capital. Most of the total value of a transaction is financed with debt, which is secured by assets and cash flow of a company being taken over rather than a buyer. Companies bought through leveraged buyouts (LBOs) substantially increase their return on equity (ROE) thanks to an increase in operating efficiency, higher debt leverage and better allocation of assets. In consequence of the substantial improvements in companies' performance, LBO transactions can yield extraordinary benefits to both existing shareholders and LBO investors. A case study of a hypothetical leveraged buyout of a Polish public company listed on the Warsaw Stock Exchange highlights the extraordinary returns available to existing shareholders as well as buyout investors. The case study also analyzes the whole process of a leveraged transaction in order to prove its feasibility in the Polish market. Finally, it speculates on the improvements to the company's performance in the wake of the leveraged buyout. Microeconomic improvements at the leveraged firm level translate into large benefits to the whole economy. On a macroeconomic level, leveraged buyouts contribute to better allocation of capital and higher efficiency of the economy. Leveraged buyouts through replacement of equity capital in post-LBO companies with debt, contribute to freeing scarce equity capital away from declining, low-value added industries into high-risk, high-value added emerging industries, which could not be otherwise financed with debt. Leveraged buyouts can be successfully used in post-socialist countries as a potent tool for acceleration of their economic restructuring. Since efficiency of companies in post-socialist countries as measured by ROE is much lower than in the developed countries, LBOs offer higher benefits to post-socialist countries than to developed countries.