How Value is Created in Chemical LBOs

In the chemical sector, the received wisdom is that in their relendess focus on making money, LBO practitioners resort to slash and bum tactics, compromising environmental health and safety. They are sometimes referred to as the bottom fishers looking for a quick flip . In addition, they are often described as financial magicians who turn solid balance sheets into smoke and mirrors. 

Our analysis and interviews suggest that the reality is different from the above myths about chemical LBOs. For example, the facts are quite contrary to the be-Hef that health, safety and environment (HSE) issues in chemical plants are compromised under LBO firm ownership. One manager spoke of a radical change under an LBO owner from a situation where the HSE record was so poor it was impossible to get insurance to one where the compan/s reception area is plastered with safety awards. Another LBO, Victrex, won awards from the UK s Royal Society for Prevention of Accidents in each of the first two years foUowing the buy- 

Finally, smoke-and-mirrors financial engineering, especially the use of debt to replace equity, does not create a lot of value in and of itself It turns out that the cost of capital is more or less independent of leverage, since the tax advantage of a high level of debt is almost entirely offset by the higher cost of that debt. How- 

Total value creation USD 362 nimion (133% of total acquisition valne)  

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