Question Tag: Leveraged buyout

Advantages of LBO for ABC Ltd:

1. Cost Savings from Delisting: Once ABC Ltd is converted to a private company, the costs associated with maintaining its listed status, such as meeting regulatory listing requirements, can be eliminated.
2. Reduced Volatility in Share Value: Delisting will make the company less vulnerable to stock market fluctuations and inefficiencies, reducing the volatility of its share value.
3. Increased Managerial Focus: As a private company, the management can focus on long-term business goals rather than short-term profitability targets to satisfy shareholders. This could lead to better strategic decisions.

Disadvantages of LBO for ABC Ltd:

1. Reduced Marketability of Stock: Delisting from the stock exchange will decrease the liquidity and marketability of ABC Ltd’s shares, which might negatively affect its share value.
2. Higher Financial Risk: An LBO involves significant debt financing, increasing the financial obligations of ABC Ltd. If the company fails to generate enough cash flow to meet these obligations, it could face bankruptcy.
3. Potential for Poor Corporate Governance: Without the regulatory oversight associated with being a publicly listed company, ABC Ltd may be perceived to have weaker corporate governance practices, potentially lowering its credit rating and investor confidence.