From Mr David Haarmeyer.
Sir, Richard Beales ("Growth not cuts are new LBO target", FT Weekend, July 29/30) failed to mention two fundamental characteristics of leveraged buy-out deals that indicate today's deals are not really different than those of the late 1980s, the time of the RJR Nabisco deal.
First, leverage can indeed amplify return on equity, but its role is much broader and more important. Taking on debt enables equity to be concentrated in fewer hands - making managers and often directors into owners. This reduces corporate governance problems and sharpens incentives to perform. Leverage also forces management to focus squarely on increasing revenue and cutting costs to pay down debt, and not on value-destroying acquisitions.
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