I think you have confused cause with effect.
Debt is cheaper than equity. The purchaser isn't diluting their equity returns as much so in theory they're getting a higher return. Interest is usually slightly higher than usual corporate lending so banks win. The profits should be more positive so the purchasee employees should be better off.
So a LBO is a generally good idea other than its much more complicated and only scales to large purchases (like a nationwide toy store, perhaps)
The effect you're probably confusing with the cause, is a deal thats dead, zero-sum or worse, with a pure equity structure might barely flip slightly positive if you do some financial alchemy and run it as a LBO... however thats exactly the kind of situation thats highly likely to crash and burn, no matter what you do. Essentially you get to try doing nothing and go out of business two years ago, do a pure equity deal and go out of business last year, or do a LBO and go out of business this year, or maybe, possibly, LBO has the best chance of making it.
Its a common pattern often seen in military or business argument, a small scale tactic that maximizes success (minimalizes failure, I guess) when in retreat somehow gets blamed as the sole cause of the entire retreat itself. Smoke grenades screen a retreat better than clear air, therefore the war was lost or maybe a bad idea to start because we tossed smoke, well, it doesn't really work that way.
In a very wide sense you are sort of correct that a deal or a company thats only microscopically barely alive by using every trick in the book including LBOs is correctly perceived as a dead company walking; just remember that almost all companies that successfully LBO are never talked about, therefore in a weird survivorship bias like scenario the general public will never hear about LBOs except in the case of a dead company. A good analogy would be lots of people who die immediately spent some time in a ICU, therefore there seems no purpose to ICUs other than death. However, many/most people only spend a little while in ICU and then recover but you'll never hear about it, they'll just call it post op recovery or critical care or some similar euphemism.
Another weird medical analogy is doctors play an odds game. If the medical advice is the lowest risk treatment X is 90% success and 10% fatal, one patient dying doesn't disprove that advice, especially if 9 or more live, also you're only likely to hear about the fatalities which causes a false belief that docs are always wrong.