Investment Interest Expense

See: Leveraged Buyout. See: Management Buyout.

The purse company was failing. It had once had a prestigious brand among shopping afficionados. But the company grew arrogant. It drew back splits with retailers, and eventually the retailers rebelled. So the company, which used to trade at 12 times cash flow, now trades at 6 times, because its revenues are flat at best. And it is fading in relevance.

Time for the LBO/Private Equity vultures to come around.

The typical structure: they borrow a ton of money, buy the company, fix it, and hope that, when it comes public again, it has much better future prospects than it does today. A huge delimiter in how much that private equity shop can pay for the firm revolves around the interest expense it will incur in borrowing the money, which will then be used to buy the purse company. With half a billion dollars borrowed, even a difference of 1% comprises a cost difference of 5 million bucks a year. So the IIE is a big fat hairy deal when bidders do their calculations for what they can or can not pay.