The marriage of the LBO financing structure combined with a business that needs to invest and innovate to survive in a rapidly changing market becomes a straight jacket that chokes off a businesses ability to change and be resilient and is a bad instance of capital expertise. The debt service costs combined with a preoccupation to return dividends to equity owners leads to short-term cost cutting decisions, fragilizes the business and rarely allows the business to survive. The post-LBO bankruptcies of Payless and Toys “R” Us are instantiations of this idea. Often, the success of this strcuture is oversold (hat tip: @cedric).
In contrast, this structure did work for Dell, but I think it was due to several factors: the FCF generations of PC business, the embedded assets of VM Ware that gave Dell / Silverlake latitude, and Michael Dell’s significant positions, attention, and credibility / reputation. What other successul LBOs have occurred? Why were they successful?