You’re the CFO of the Littleton Lighting Company. Joan Brightway, the president, has approached you and the firm’s other senior executives with a proposal to take the company private through an LBO. She says that this is a good time to do it because the economic outlook is shaky and the firm’s stock price is depressed, so it will take less money to acquire control. You agree that the weak outlook has depressed the stock’s price, but aren’t sure that this doesn’t argue against an LBO at this time. You also suspect that some fundamental weakness is developing in the demand for the firm’s product.
Certain successful LBOs have received a lot of favorable press lately, and you’re concerned that Joan and the other nonfinancial executives may not appreciate the risks involved in the procedure. Prepare a memo outlining what’s involved in an LBO and why the maneuver is risky, especially with respect to the business’s performance in the immediate future. Make a recommendation on the analyses that should be undertaken prior to going forward.