One of the earliestleveraged buyouts (LBOs)occurred in
1979 andinvolvedCongoleumInc.,adiversifiedfirminship
building,flooring,andautomotiveaccessories.Congoleum’s
own management bought out the firm. The favorable
treatment that would be accorded the firm’s assets by tax
authoritieswasamajorreasonbehindthetakeover.Afterthe
takeover—estimatedtocostapproximately$400million—the
firmwasallowedto writeupits assetstoreflecttheirnew
marketvaluesandtoclaimdepreciationonthesenewvalues.
Theestimatedchangein depreciationandthepresentvalue
effect of this depreciation based on a tax rate of 48%,
discountedatthefirm’scostofcapitalof14.5%,areshownin
the following table (in millions of dollars):
Notethattheincreaseindepreciationoccursinthefirstseven
years,primarilyasaconsequenceofhigherassetvaluesand
accelerateddepreciation.Afteryear7,however,theoldand
newdepreciation schedulesconverge.Thepresentvalue of
the additional tax benefits from the higher depreciation
amountedto$41.76million,about10%oftheoverallprice
paidonthetransaction.Inrecentyears,thetaxcodecovering
assetrevaluationshasbeensignificantlytightened.Although
acquiring firms canstillreassessthevalue oftheacquired
firm’s assets, they can do so only up to fair value.