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5. Excessive Debt Levels

Brian Buntz

March 9, 2016

1 Min Read
5. Excessive Debt Levels

5. Excessive Debt Levels

In two cases, a "winner's curse" in a leveraged buyout and the resulting excessive debt level proved too much.

"Debt levels are an important part of our analysis," Kaplan says.

Maxxim Medical Group, for example, used a series of acquisitions to become a leading U.S. producer of nonlatex medical gloves and custom procedure trays during the 1990s. It went private in 1999 through a leveraged transaction largely financed by debt, only to then be hit with lower-than-expected revenues and operating margins as health care providers joined group purchasing organizations. The straw that broke the camel's back was a decision to improve margins by substituting lower-cost instruments in place of the ones specified by the customers in its custom procedure trays, according to S&P. Maxxim went into default in 2003.

CDK Kendall Co. was a maker of disposable medical supplies that defaulted in 1992. Clayton & Dubilier acquired the company in 1988 for $960 million. Says S&P: "The key factor leading to default was the company's excessive level of debt, stemming from the high valuation and unrealistic performance expectations. The performance shortfalls occurred early on due to declining sales in several divisions, the 1990-1991 recession, and increased expenses resulting from a voluntary recall in the institutional health care products unit. That recall led to turnover of key employees, including the CEO position, which changed twice."

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