Many leveraged acquisitions during the boom period from 2005 to 2007 were also financed with excessive debt burden. The reason for the failure of the federal acquisition was excessive debt financing, which accounted for about 97% of the total cost, resulting in huge interest payments exceeding the company’s operating cash flow. Usually, the company will not declare bankruptcy, but negotiate debt restructuring with its lenders. Financial restructuring may require equity owners to inject more funds into the company, while lenders waive part of their claims.
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In other cases, the lender injects new funds and assumes company equity, while the new database existing equity owner loses shares and investments. The company’s business activities are not affected by this financial reorganization. Nonetheless, financial restructuring requires strong management attention and may cause customers to lose confidence in the company. The failure to repay the debt during the leverage acquisition may be due to the excessive initial pricing of the target company and/or its assets.
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Overly optimistic predictions of target company revenue may also lead to financial distress after acquisition. Some courts have found that in some cases, if the leveraged acquisition debt is determined to be the cause of the closure of the acquired company, the debt constitutes a fraudulent transfer under the US Bankruptcy Law. [39] The outcome of a lawsuit that treats lever acquisition as a fraudulent transfer usually depends Book Your List on the target company’s financial situation at the time of the transaction, that is, whether the risk of failure is high and whether it is known at the time of leverage acquisition, or whether it is subsequently unpredictable Events led to failure.
