Equity Transactions Research Articles

Impact of Private Equity Deals on Shareholder’s Wealth: An Analytical Insight

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years. Institutional investors in developed countries, for their portfolio diversification, are continuously seeking new destinations and innovative and alternative asset class. Private Equity is one such investment avenue which is broadly defined as involved investment in Equity linked to an asset that is not listed and therefore not publicly traded in the stock markets. With increasing number of deals the subject becomes an important aspect of Indian economy as this could lead the Indian economy in either direction. This paper deals with the application of Elton and Gruber (1995) model on a sample of seven renowned PE deals in India for studying their impact on the shareholder’s wealth.

Irrational Exuberance and the Economic Cities

Financial Markets in the 1990's were labeled as Irrational Exuberance, yet they produced the Internet. Sometimes flooding the market with cash feeds innovation and the creation of magnificent things. I love the Internet. same thing can be said about the GCC region in the first decade of the 21st Century. A flood of money has created the 8th and 9th Wonders of the World. Take a look at the Tallest Buildings and the Palm Shaped Islands that have appeared in less than a decade. growth continues despite the Financial Crises and the decline in Tourism.Now we are working on Economic Cities to develope Industrial Zones, Universities, and Tourism Locations. fact is 2010 is going to see some extraordinary growth be it on the Internet with the Facebook IPO or in the real world with Economic Cities.We are living in interesting times.Welcome to 2010...... Economic City Case Study.Status Quo Dec, 24th 2009:The Economic Cities are Master Developers who derive their revenues from leases and sale of land. They also intend to own a significant percentage of a number of the manufacturers in the Economic Cities (EC). I have interviewed a series of Senior level Managers at three Economic Cities. Their responses were merely an echo of the original Master Plan that was created by SAGIA prior to The Global Financial Crises. There was a tone of innocence in their voices, as they repeated the same rehearsed speeches. They are depending upon the Saudi Govt. loans, foreign direct investment from of manufacturers and tenants, and they firmly believe they deserve unsecuritized term loans.In terms of the Saudi Budget: news was just released last Monday. I have posted links to the recent articles discussing details.In terms of the Financial Markets and the Global Economy: I spent about a month explaining the state of the financial markets, defining Private Equity, defining CDS's, IPO's, Rights offerings (Secondary Stock), Sukuk, Murabaha, and all the conventional products.In terms of their desire to attain unsecuritized term loans: This remains challenging for the international Islamic Banking market. first reason is fundamentally Islamic Banking is collateral based loans (An unsecuritized loan by definition is against that protocol). second reason is based on the limitations of the local banks in terms of their own PAID UP CAPITAL. They can't invest large amounts of money for an extended period of time (5 to 7 years is the norm for a Sukuk offering).In terms of waiting for Multinational Corporation to approach the EC with an investment: I believe that the EC has not fully grasped the full scope of the Financial Crises, and the subsequent ramifications on their respective balance sheets.* As if the manufacturers are able to maintain their own working capital requirements.* As if the manufacturers could afford the relocation expenses .* As if the EC's are oblivious to the job cuts, bankruptcies, and production cuts around the world.* As if every Multinational Corporation isn't trying to guarantee their investments with Credit Default Swaps.* As if Credit Default Swaps are being regulated in an exchange like the CBOE.Our Recommendation:We believe they could benefit from the status quo of the financial markets by acquiring manufacturers that are liquidity starved. Thus vitalizing the economy & facilitating growth by hiring the engineers & acquiring the equipment. At least then the Economic Cities could claim to have some assets on their respective balance sheets. Our other recommendation was to sell portions of the Economic city as a form of collateral to the financiers. I did presentations on Quasi Equity Deals (Convertible Debentures) and Pipe Mezzanine Financing. Then the Govt. of KSA announces a 14% increase in the 2010 Budget.Macro Economic View of Local Markets and the Economic Cities :The Kingdom of Saudi Arabia announced an annual budget for 2010 of SR540bn ($144bn) – 14 percent more than its 2009 budget, and the largest in the Kingdom’s history. Thus His Excellency King Abdullah bin Abdulaziz is spurring the growth of the local economy and the prospects of the Economic Cities.Micro Economic view of the Economic Cities:A. International sources of financing are available and more financial engineering solutions are being developed. (ie: Islamic Finance, Islamic CDS, Conventional products, etc.)B. Acquisition Strategy is the appropriate Strategy for the Master Developer, and the Manufacturers in this Global Financial Crises.* Assume the market is liquidity starved* Assume Manufacturers are Acquisition Targets* Assume the Master Developers are interested in running the manufacturers like a conglomerate.* Mergers and Acquisition specialists will be working around the clock on acquiring the manufacturers for the EC's.* Furthermore the Master Developer can spin off the companies in the form of IPO's on the Tadawul the Saudi Arabian Stock Market.Stay Tuned to the Evolution of Kingdom of Saudi Arabia.

Do Investors Understand Really Dirty Surplus?

This study addresses whether firms’ share prices correctly reflect two accounting measures, dirty surplus and really dirty surplus. Dirty surplus is readily observable from the financial statements, but really dirty surplus, which arises from recognizing equity transactions such as employee stock option exercises at other than fair market value, is not. Findings show that dirty surplus and really dirty surplus are irrelevant for forecasting abnormal comprehensive income. However, findings also indicate that investors appear to undervalue really dirty surplus. Hedge returns are insignificant when portfolios are formed based on dirty surplus, but are significantly positive based on really dirty surplus. Really dirty surplus positive hedge returns are robust to a variety of sensitivity tests. Taken together, the findings are consistent with either investors overvaluing firms that have large negative really dirty surplus or really dirty surplus being correlated with an unmodeled risk factor.

Active Investors, LBOs, and the Privatization of Bankruptcy

In this testimony to the House Ways and Means Committee on February 1, 1989 (when LBOs and other highly leveraged transactions were under fierce attack by politicians and the media), the author identified “LBO associations” such as KKR and Forstmann Little as a valuable innovation in organizational form—a new model of management and governance that was competing directly with the headquarters of large public corporations, especially conglomerates. In the author's words, LBOs “substitute incentives provided by compensation and ownership plans for the direct monitoring and often centralized decision‐making in the typical corporate bureaucracy.”In illustrating his point, the author noted that whereas the CEOs of U.S. companies during the '70s and '80s saw their personal wealth go up by only about $3 for every $1,000 increase in firm value, the average CEO in an LBO experienced a change of $64 per $1,000—and for the partners of the LBO firm, the closest equivalent to a conglomerate CEO, the change was about $200 per $1,000.Based on the performance of the first wave of LBOs to return to public ownership, such dramatic concentrations of equity ownership appear to have produced large gains in operating efficiency. (And since the author's testimony, these findings have been confirmed by subsequent studies of later periods and in other countries.) The heavy debt loads in these transactions, besides making possible the concentration of equity ownership, also perform an important control function, intensifying the search for efficiencies and discouraging reinvestment in low‐return projects. For those LBOs that have trouble servicing their debt loads, the author argues that the costs of insolvency should turn out to be significantly lower than for traditional public companies because LBOs provide strong incentives to keep the process of reorganizing troubled companies out of the bankruptcy court (a prediction that, although proving wrong in the early‘90s, has turned out to be true of the most recent wave of private equity deals).

Is Private Equity Out of Control in Latin America?The Impact of Structures on Private Equity Transactions in Latin America 1988–2007

This article focuses on the impact of structuring private equity transactions among emerging markets with the same legal origin: French civil law. The article focuses on the different strategies followed by private equity funds investing in Latin America as a possible explanation of the performance of the investments and its impact on attracting future private equity flows. Empirical evidence for 25 countries in Latin America and 1,762 transactions from 1998 to 2007 are used as supporting evidence. <b>TOPICS:</b>Private equity, emerging, legal/regulatory/public policy, statistical methods

Private Equity in Australia

Private equity investment in Australia has changed in both extent and nature over the last few years. In particular, transactions where a private equity fund buys out a mature publicly listed company have increased. The targeting of ‘iconic’ companies such as Qantas by private equity heightened the concerns held in some quarters of the possible impact of private equity ownership on corporate stability and employment conditions in these companies. This article provides an overview of private equity transactions in Australia. It also reviews the major concerns with the private equity business model, which were presented by various parties to a senate enquiry in 2007. It argues that a window of opportunity was open during 2006 and 2007 for private equity owners to extract returns on their investment by reducing employment costs using the Work Choices legislation. That such an approach was not pursued suggests that private equity funds realize returns through a number of avenues, not just by reducing running costs or rationalizing productive assets.

Private Equity: Levered on Capital or Labour?

This article argues that, during the 2002—7 conjuncture, private equity was levered on capital, not labour. During this period of rapid up-scaling the sources of the gains were variable and included financial engineering and windfall trading gains. In general terms, the favourable conditions of cheap and available debt meant that restructuring at the expense of employment conditions was not a necessary, or even important, part of all private equity deals. The first half of the article reviews the narrative and numbers on the employment effects of private equity, highlighting the counter claims of different narrative positions and the heterogeneous nature of the evidence. The second part of the article presents an alternative view of private equity, arguing that the change in conjuncture after the credit crunch that began in 2007 will mean that different sources of gain become more important.

Private Equity, Investment and Financial Constraints - Firm-Level Evidence for France and the United Kingdom

The welfare effects of private equity transactions are debated controversially. We analyze the impact of expansion financing and buyouts by private equity investors on investment of portfolio firms in the UK and France - two countries with different financial systems. Unobserved heterogeneity and the endogeneity of private equity transactions financed by venture capital companies are addressed using dynamic panel data techniques. In both countries we find that portfolio firms display higher investment levels and a lower dependence on internal funds after expansion financing. Buyouts financed by venture capital companies are neither associated with a decrease in investment spending nor with an increase in the dependence on internal finance. In contrary, private equity based buyouts in the UK outperform non-private equity backed British firms in terms of both indicators. Contrasting the notion of several policy makers,we cannot detect that private equity based buyout financing yields higher financial constraints on average.

Lessons Learned from Private Equity Deals

For deal lawyers, 2007 was an interesting year. The two prior years produced a record number of acquisitions by private equity firms, and 2007 initially appeared to be following suit. But the credit market tightened and the stock market softened in the latter part of 2007, putting a crimp in the smooth closing of many of the deals signed earlier in the year. Buyers grappled with buyer’s remorse, lenders rethought their willingness and ability to finance various deals, and sellers were forced to closely examine what – if any – leverage they had to close the deals they signed in more certain times. Skittish buyers and sponsors tried to escape their deal obligations by invoking the material adverse change (MAC) clauses and reverse termination fee provisions in their merger agreements. In response, sellers attempted to secure their buyers by arguing that MAC provisions were not implicated by the circumstances at hand, and specific performance was required. The resulting jousting, maneuvering, litigation, settlements, and fall-out has provided a stream of learning opportunities for deal lawyers, bankers, and business people alike.

Value Creation in Middle-Market Buyouts: A Transaction-Level Analysis

Is private equity an effective governance structure, or simply a means of transferring wealth from Main Street to Wall Street? How do buyouts affect target-company organization and strategy? How do deal characteristics such as size, industry, transaction complexity, buyer characteristics, holding period, and the like affect the performance of private-equity transactions? Are revenue improvements driven primarily by changes in employment and capital expenditures, or by changes in organization and strategy? Despite a healthy literature on buyouts, little is known about the details of private equity transactions, as most studies rely on publicly available data or confidential data from a single buyout firm. This paper uses a unique sample of 288 exited transactions over a 20-year period across 19 industries from 13 buyout firm firms, based on confidential data from detailed interviews with the general partners of several leading private-equity partnerships. While prior studies have focused on whole-company, going-private buyouts, our sample includes transactions with minority stakes, syndicate deals, and consolidating roll-up or add-on strategies, and we have detailed information on internal rates of return, leverage, equity stakes, and other deal characteristics. We find that the pursuit of ancillary consolidating acquisitions is the biggest driver of post-buyout revenue and profit growth, that solo deals and deals with controlling stakes outperform syndicated or club deals, that rates of return have declined over time as buyout markets have become more competitive, that mitigation of agency costs is critical for deal success, and more generally, that private equity can improve the performance even of sound businesses by providing access to resources, industry-specific expertise, capital for recombining assets (most often, consolidation in a fragmented industry), or recapitalization and ownership transition. Finally, our findings suggest the potential for further research of private equity at the transaction level.

ASRs Part V - Rumpelstiltskin Accounting: Spinning Gold from Straw (Silicon Image Addendum)

The current study celebrates Silicon Image's 2008 $62 million accelerated stock repurchase (ASR) program. Companies commonly indicate ASRs contractually promise execution of stock buybacks at a favorable price. To the contrary, analysis of a small sample of 2006-2007 ASRs has found: 1) Inferior risk/reward relative to simple alternatives (inefficient execution), 2) Liability (ASRs are denied a 10b-18 safe harbor against charges of manipulation), 3) Disturbing, pre-deal, stock activity (prices rise 10% shortly preceding an ASR), 4) Idiosyncratic, incomplete, and sometimes misleading disclosures. 5) Disproportionate exposure to counter party risk. Silicon Image's ASR shares the standard shortcomings, but the firm's auditors, executive protestations notwithstanding, go the extra mile in delivering an imaginative rendition of reporting conventions. In conformance to 15th century tradition, modern accounting deems that equity transactions, including stock repurchases, never give rise to income. Accordingly, Silicon Image might, in a run of the mill performance of ASR financial legerdemain, after paying a premium price for its repurchases, with the usual hocus-pocus presto-change-o, flash-of-light and puff-of-smoke, have commissions, fees and true economic consequence of fluctuating share prices vanish...materializing in their stead, from thin air, an unblemished income statement, pristine, the proverbial white rabbit. But, with an extra flourish and added abracadabra, Silicon Image's auditors transmogrify the $62 million ASR into a $1 million reported profit earned through the transaction's dealings with counter party banker Credit Suisse. Now, that is some trick. We need not believe Credit Suisse took a loss on its side of the bargain (do we rush to aid the lady the magician will saw in half?); the illusion is spectacle enough, and it would be dangerous to interfere. In brief, Silicon Image makes full use of conventional stock buyback reporting blandishments, but its auditors go a troll's stomp further in insisting the firm profits and that, like Rumpelstiltskin, their client Silicon Image spins gold from straw.

Common Terror: Permissible Error in Financial Statements - Teradyne Case Study - Why a $24 Million Accounting Error Need not be Corrected

In 2002, the SEC, citing a need for transparency, promulgated new disclosure rules pertaining to corporate stock repurchase programs. As a result, companies since 2004 have been required to provide monthly reports on the volume and pricing of their stock buybacks. Under the new reporting protocol, Teradyne's monthly report for October 2007 erroneously excluded 1.738 million shares reacquired for $24.151 million at $13.90 apiece. The company decided no correction to the misstatement was necessary. The apparent lesson from the Teradyne case is: 1) Either a $24 million error is insignificant 2) Or the mandated 10Q/10K tables showing monthly corporate stock repurchases need not be accurate. In a world in which equity transactions such as stock repurchases, in conformance to 15th century tradition, are deemed never to cause a profit or loss, it makes sense both that $24 million be disregarded as insignificant and that corporate stock repurchase reports tolerate inaccuracy. But, if such reasoning seems out of joint, perhaps Teradyne should correct its error? More appropriately, accounting for equity transactions should be broadly revisited. In the market for corporate stock repurchases which, at its peak in 2007, exceeded a $700 billion annual rate, insult to common shareholders may be done a penny at a time (excessive fees, benefits to option holders, disregard of pricing, risk of insider trading) but, in the end, is tantamount to death by a thousand pinpricks and burial unnoticed in a pauper's grave. For instance, a recent study suggests losses to investors from U.S. corporate buybacks are now approaching $2 trillion (a benefit sellers reap at the expense of faithful investors). In the mayhem of financial ruin, the equanimity of accounting statements, in their total disregard of equity transaction losses, is a final indignity borne by shareholders. Common TERROR, a commentary on Teradyne's ethereal view on permissible error in financial statements, highlights that rules of equity accounting are overdue for overhaul. The solution is simple: Treat equity transactions the same as any other asset or liability with gains/losses included in the income statement. Tolerance for misstatement will vanish.

Corporate Governance and Value Creation: Evidence from Private Equity

We examine deal-level data from 395 private equity transactions in Western Europe initiated by large private equity houses during the period 1991 to 2007. We un-lever the deal-level equity return and adjust for un-levered return to quoted peers to extract a measure of abnormal performance of the deal. The abnormal performance is significantly positive on average, and stays positive in periods with low sector returns. In the cross-section of deals, higher abnormal performance is related to greater growth in sales and greater improvement in EBITDA to sales ratio (margin) during the private phase, relative to those of quoted peers. Finally, we show that general partners with an operational background (ex-consultants or ex-industry-managers) generate significantly higher outperformance in organic deals that focus exclusively on internal value creation programs; in contrast, general partners with a background in finance (ex-bankers or ex-accountants) generate higher outperformance in deals with significant M&A events. We interpret these findings as evidence, on average, of positive, but heterogeneous skills at deal partner level in private equity transactions.

Private Equity, Investment and Financial Constraints - Firm-Level Evidence for France and the United Kingdom

The welfare effects of private equity transactions are debated controversially. We analyze the impact of expansion financing and buyouts by private equity investors on investment of portfolio firms in the UK and France - two countries with different financial systems. Unobserved heterogeneity and the endogeneity of private equity transactions financed by venture capital companies are addressed using dynamic panel data techniques. In both countries we find that portfolio firms display higher investment levels and a lower dependence on internal funds after expansion financing. Buyouts financed by venture capital companies are neither associated with a decrease in investment spending nor with an increase in the dependence on internal finance. In contrary, private equity based buyouts in the UK outperform non-private equity backed British firms in terms of both indicators. Contrasting the notion of several policy makers,we cannot detect that private equity based buyout financing yields higher financial constraints on average.

Which Factors Influence Trading Costs in Global Equity Markets?

This article examines global trends in equity-related transaction costs and trading volume by identifying recent patterns in institutional brokerage commissions, indirect trading costs, and trading activity. The results indicate a steady decline in brokerage commissions around the world, but indirect trading costs appear to have reached a plateau. The fastest growth in trading volume can be found in the emerging markets of South America, but the United States leads the way in terms of the steepest reductions in transaction costs. The empirical evidence also shows there is a simultaneous relationship between global equity trading volume and transaction costs that is driven by trends in both U.S. and local equity markets. This suggests that global investors are likely becoming more cost-sensitive and increasingly open to directing orders to those international markets where transaction costs are lower.

An Anatomy of Institutional Trading Records

This paper explores a unique data set comprising the transactions executed by a large sample of mutual funds for the period August 2002 - April 2007. This data set qualifies as a worthy counterpart for another (often used) transactional data set provided by the Plexus Group. It will serve as input for various papers, but is interesting in its own right. We discuss the structure of the data set, we enumerate the major asset classes traded by the institutionals and we describe the global representation of the traded securities. Finally, we detail the filtering procedures necessary to obtain a sample of equity transactions executed by actively managed mutual funds.

Collateral Damage: Do ASRs Carry Counterparty Risk? - Evergreen Solar Case Study

The case of Evergreen Solar (ESLR) suggests counterparty risk exposure be added to the litany of misgivings on the economic efficiency, absolute performance, and governance conflicts of ASRs. Evergreen Solar in July 2008 issues a convertible, enters into an offsetting, broker-backed long call-spread, and signs a stock loan/collateral agreement. Two months later, the underwriter files for bankruptcy placing Evergreen, with about 134 million shares outstanding prior to the transaction, at risk of having issued 31 million shares at a price of $0.00 (zero). Coincident with the bankruptcy filing, Evergreen rushes to assure funding by the broker/banker of a segregated collateral account. The wake up call that complex equity deals may carry substantial counterparty risk is, at best, unpleasant. The Evergreen case does not include a conventional ASR, but its three components together share many convertible-funded ASR features. That commonality raises the question of whether, similarly, the counterparty risk of complex ASRs might be routinely underestimated. In light of current economic dislocations, companies contemplating execution of complex ASRs (or with ASRs in progress) ought to weigh whether counterparty risk is attached and, if so, the adequacy of compensation. What to look for? In the case of Evergreen, the noose with the agreement might have been a clue.

Black economic empowerment ownership initiatives: a Johannesburg Stock Exchange perspective

The success of black economic empowerment (BEE) is still not clear. The objective of this paper is to assess the results of BEE equity transfers and contribute to the development of a framework to assess the cost/benefit of transferring equity in this fashion. BEE data from 62 companies listed on the Johannesburg Stock Exchange were analysed using a qualitative methodology and descriptive analysis. The results indicate that respondent companies have transferred less than 25 per cent equity to BEE partners, that a majority of firms appear to support the social objectives of BEE, that external partners appear to best promote shareholder wealth, and that the primary source of funding for BEE equity transactions is third-party funding or the respondent companies themselves. Finally, the Malaysian experience of affirmative action offers some useful lessons for South Africa's BEE programme, as well as some valuable insights into the economics of wealth redistribution.

Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Cost

Using a proprietary dataset of institutional investors’ equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We find that trading desk skill is positively correlated with the performance of the institution’s traded portfolio, suggesting that institutions that invest resources in developing execution abilities also invest in generating superior investment ideas. Although some brokers can deliver better executions consistently over time, our analysis suggests that trading desk skill is not limited to a selection of better brokers. We conclude that the trade implementation process is economically important and can contribute to relative portfolio performance.

Syndication in Private Equity Transactions

We empirically investigate possible reasons for successful syndications in private equity transactions. To this end, we analyze the answers of 115 private equity firms regarding relevant resources of potential syndication partners. Based on structural equation modeling we find that only three out of six main resources of potential syndication partners have a significantly positive impact on the perceived success of a private equity syndication: financial resources, organizational network and a syndication partner's reputation. Rather remarkably, shorter distances between a potential syndication partner and the portfolio firm have a significantly negative influence on the perceived success of a syndication, while a partner's implicit knowledge and experience as well as issues of the organizational culture are of no significant importance. Notice: Paper is written in German.