Public-To-Private Leveraged Buyouts

Abstract

This chapter examines which types of firms go private as well as the determinants of takeover premiums in leveraged buyout (LBO), transactions. During the 1980s, LBOs grew substantially in the US, and gradually spilled over to the UK. Between 1979 and 1989, the market capitalization of public-to-private (PTP) transactions in the US alone was in excess of $250 billion. One way of refocusing management's attention on shareholder value creation is the LBO, in which an acquirer takes control of the firm in a transaction financed by funds borrowed against the target's assets and/or cash flows. Three hypotheses underlie this claim: the incentive realignment hypothesis, the free cash flow hypothesis, and the control hypothesis. The control hypothesis suggests that shareholder wealth gains from going private largely result from an improved monitoring system imposed on the management team. While agency cost theory predicts these three distinct sources of wealth gains for LBOs, it may be difficult in practice to distinguish between these hypotheses.