Value Creation Drivers in Large Leveraged Buyouts

Abstract

This work employs the most complete data sample of large private equity backed transactions in Germany ranging from 1997 to 2008. This research casts light on the impact of the holding period, the effects of divesting activities and expectations about the future shape of the economy on the performance of deals. A longer holding period is associated with a lower internal rate of return, and, contrary to expectations, this study finds a return diminishing effect of selling subsidiaries of target companies. In addition, I apply a new measure of business expectation: ifo slope. Ifo slope incorporates the theory of the interest term structure as a business economic development indicator. Positive expectations at entry lead to higher returns in the future and periods of economic downturn are stretching the length of the investment dramatically. Finally, larger deals are financed more aggressively with debt and generate more value by multiple expansion than smaller deals.