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The LBO Puncture Wound

The last thing private equity firms would seem to need these days is some coaxing from Wall Street investment banks to pull off another super-sized leveraged buyout.

Buyout firms are having no trouble raising money from institutional investors and tapping the bond market to finance their acquisitions. If anything, the biggest problem for private equity firms is finding an enticing company to buy, not putting together the cash and debt to pay for a deal.

Yet that's not stopping investment bankers from pushing companies into so-called stapled financing deals -- prepackaged debt offerings that are often used to stoke the interest of reluctant buyout firms. Not surprisingly, the investment bankers recommending this strategy to their merger clients are often the same ones putting these stapled financing deals together and then peddling them to the buyout crowd.

Stapled financing is something bankers dreamed up four years ago when the merger market was moribund and buyout firms had a hard time lining up financing for a transaction. The bankers argue that these ready-made packages of bonds and loans are a good way of showing buyout firms just how easy it is to get financing for a deal.

But stapled financing presents an obvious conflict of interest for Wall Street bankers. It's never a good policy for an investment bank that's advising a company on a takeover to get too chummy with any of the potential buyers. Still, stapled financing was seen as a necessary evil given the difficult environment for LBOs at the beginning of the decade.

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