Do Banks Build Bridges in LBO Transactions?

Abstract

This paper documents connected leverage buyout (LBO) transactions in which acquiring private equity (PE) firms and target firms share common relationship banks. Connected LBO deals have lower prices, higher valuations and better qualities. Firms share common relationship banks as PE firms are 7% more likely to become targets in LBO transactions led by the same group of PE firms. Common relationship banks which build bridge between PE firms and target firms are 35% higher in probability to be chosen as lead bank in these LBO transactions and increase the future business interactions with these PE firms as well. I argue that banks build bridges between targets and acquirers in LBO transactions with their private information obtained through past business relations not only to strengthen business tie with PE firms, but also to generate business opportunity to boost their short and long run profitability.