Private equity firms have become an important player in the acquisition market. These private investment groups offer to buy a target firm, often with the cooperation of management, and then take the firm private. Private equity buyouts rose from just 2 percent of U.S. merger and acquisition activity in 2000 to 15 percent as of December 2005. Private equity buyers tend to finance a significant portion of the acquisition with debt.

a. What types of firms would make ideal candidates for a private equity buyout? Why?

b. How might the buyout firm add sufficient value to the target to justify a high buyout premium?