What Does an <i> LBO</i> Have in Common With a <i> 24-Hour DS</i> : By MARVIN SEID

The language of high finance, never a model of clarity, has lately become very murky indeed. People talking about all that big business stuff now use words that leave the meaning of what they’re trying to say obscure. This has led to no little confusion about what they are up to. As a public service, here is a guide through the linguistic jungle.

Among the more unfamiliar words that keep popping up is arbitrageur (pronounced R-B-tra-zhour). An arbitrageur is someone who finds out before other people do that something is worth more than the other people think. So he buys it, and then when the other people wise up to what it’s really worth he sells it to them and walks away whistling a merry tune. There is nothing novel in this. In fact, arbitraging goes all the way back to the dawn of commerce. Its motto, loosely translated from the Sumerian, is “The early bird gets the worm, and the other chickens get plucked.”

Arbitrageurs sometimes play an important, if mysterious, role in one of the really neat economic developments of recent times. This is the leveraged buyout, or LBO (pronounced ell-bee-oh). An LBO works this way: Say that Mr. Jones covets Mr. Smith’s company, but doesn’t have the money to buy it. Does Jones sit around and sulk? Not at all. He goes out and arranges credit, and as security he pledges not his life, his fortune or his sacred honor, but (no fool, he) the assets of Smith’s company.

Of course, once the deal goes through, Jones has to sell the company that he just bought to get the money that he needs to pay back the loans. Meanwhile, though, everyone involved has had plenty of fun and excitement, and if no real economic benefit has resulted, so what? It is worth noting that in a recent ranking of things that contribute to social well-being, the LBO came in just behind the 24-hour doughnut shop.

Sometimes a company that doesn’t want to be taken over can thwart the efforts of a would-be buyer through creative management techniques. One method--variously referred to in other contexts as baksheesh, ransom or the protection racket--is to pay the unwanted suitor a bundle so that he’ll go away and start bothering someone else. Such a practice is known as greenmail, which must of course never be confused with blackmail.

For one thing, blackmail is usually regarded as the more ethically superior of the two. Nor should greenmail be confused with junk mail. Junk mail is when you get a mailgram saying that if you’ll take a bus ride out to the desert to look at some property, you could win a Cadillac, a TV set with a 96-inch screen, or any of 5,000 other prizes. Really junky junk mail is when you get an indignant letter two weeks later, demanding to know why you weren’t on the bus, and warning that if you don’t get out to the desert by next weekend the microwave oven, telephone-answering machine and Japanese camera that are being held in your name will be given away to the kid down the street.

Finally, junk mail should not be confused with junk bonds, which can be used to help pay for LBOs if a buyer happens to be a little short of cash that week and his lenders aren’t in when he calls. Junk bonds are pieces of paper that the financial community considers worthless. As a result of this valuation, junk bonds pay very high dividends, enhancing their attractiveness as a medium of exchange in leveraged buyouts. (Admittedly there is a paradox in all this that requires closer examination than can be given here.)

Sometimes a company will protect itself against a takeover by someone it doesn’t much care for by selling itself to someone it likes better. That is known as the white knight defense. There are other, less palatable, protective measures that can be taken. One of them is called the scorched-earth policy, a maneuver that basically involves destroying the company in order to save it. Another is known as the poison pill. This is a way of making the company so ugly and forlorn, so miserably unattractive, that no one in his right mind would have it.

Obviously, great care must be taken to avoid slipping the poison pill to the white knight. To do that would be to kill the goose that lays the golden egg. But even if the goose croaks, not all is lost, for if the golden egg disappears the golden parachute can always be inflated. Devised by managers who had the foresight to see that their days were numbered, this is a sort of consolation prize for losers. Essentially it allows departing managers to do to the treasury of their company what the early 5th-Century Visigoths did to Rome, or what teen-agers do to the refrigerator after school. It is not a pretty sight, and strong men have been known to avert their eyes from the spectacle.

The self-granted rewards of the golden parachute give unemployed managers the leisure to do further creative thinking and invent words that no one will understand. Out of such pondering not long ago came the concept of the leveraged buyout. Who knows what other great ideas might next be produced in the exciting world of high finance?

Marvin Seid is a Times editorial writer.