A leveraged buyout (LBO) is where one purchases enough stock of a company to control it, using borrowed money. An example would be the mortgage on your house -- a small downpayment comes out of your pocket, and the rest is borrowed from a lender using the asset (property) purchased as collateral. You then control a house worth far more than the actual investment (downpayment) out of your pocket. If the house rises in value, you profit greatly; if housing values fall, you could lose your house.
The UAW, in this scheme, would cough up enough cash to "have a stake" in the purchase of GM; the rest would be financed by a lender (investment banker, bond sale, or private consortium of lenders) using the company as collateral, and then GM would be under the control of the UAW.
The above is an over-simplification of a fairly complex process, and there are obstacles to executing it. For one thing, the UAW would have to convince the lender(s) that it has a viable business plan to turn GM around before it runs out of cash. For another, the takeover attempt could trigger a bidding war, in which two or more parties bid for GM stock, pushing the market capitalization (stock price X number of outstanding share) up to unrealistic values relative to the underlying value of the business itself. A third problem is that the market would demand a premium to the current price, perhaps 10-15% or more higher than the current price. A fourth problem is that leverage works both ways -- if the new owners are successful, and the equity of GM rises, the actual return on investment (ROI) is huge (because only a small part of the purchase came out of the UAW coffers); conversely, if GM continues to lose equity, the negative ROI can be enormous, quickly pushing the owners into tremendous losses. There are other concerns as well, but these are the primary ones, in my mind.
Another common example is the use of margin in a brockerage account. Is this familiar to you, Tim?
Bear in mind that I am a small investor (albeit a successful one), and my academic training is in electronics (I was an MCSE working for Lockheed before moving here to buy a farm), not economics or business. The whole idea of the UAW buying out GM is full of risks and details that a true professional could better enumerate, and I would imagine that there are members of this forum who can better explain it than I.
