Connected Leveraged Buyouts

Abstract

In this paper, we document connected leveraged buyout (LBO) transactions in which acquiring private equity (PE) firms and target firms share common relationship banks. We find that lower prices, higher valuations, and better quality targets characterize connected LBOs. Not only are firms that share common prior relationship banks with PE firms 7% more likely to become targets in LBOs led by the same PE firms, but common relationship banks that build bridges between PE firms and target firms are 35% more likely to be chosen as the lead debt financier in connected LBOs. These bridge-building banks also increase their future business with the PE firms. Taken together, these results suggest that in connected LBOs, banks do indeed use private information obtained through past business relations to build bridges between targets and acquirers.