Leveraged Buyouts Research Articles

Sponsor Reputation and Capital Structure Dynamics in Leveraged Buyouts

We examine whether leveraged buyout (LBO) sponsors’ reputations as borrowers affect the refinancing terms of their portfolio companies. In 510 U.S. LBOs for which we can reconstruct debt financing activity, 67% of financing events occur one quarter before the earliest existing debt maturity. These On Time events generally improve borrowing terms, whereas Early events feature more dividends, leverage, and higher cost. In each case, dividend issuance decreases and cost increases with the proportion of the sponsors’ recent exits that are failures. Effects are absent for matched firms and prior to the LBO and are procyclical; sponsors with recent failures miss opportunities to decrease financing costs in good times. This paper was accepted by Bo Becker, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.00971 .

A Study on the Relationship Between Leveraged Buyouts and Profitability

This article delves into the profitability of post-buyout subsidiaries resulting from Leveraged Buyouts (LBOs), focusing on prominent examples such as Blackstone, Hilton, Bain Capital, and Toys "R" Us. Through a comparative analysis of two scenarios, it scrutinizes the impact of LBOs on the profitability of these companies. Previous research predominantly concentrated on isolated aspects, lacking comprehensive cross-comparisons across various domains. This study addresses this gap by broadening the scope, aiming for a more holistic understanding. The paper examines notable instances such as the Blackstone Hilton lawsuit and Bain Capital's involvement with Toys "R" Us. It reveals that the success of LBOs hinges on several critical factors, including a robust underlying business model, an appropriate financing structure, and a well-defined exit strategy. By elucidating these key components, the research provides insights into the dynamics of LBOs and their implications for post-buyout profitability. The findings contribute to a deeper comprehension of the intricate relationship between LBOs and profitability, offering valuable guidance for stakeholders in the financial and corporate sectors.

Spillovers of PE investments

AbstractWe investigate a potential primary effect of leveraged buyouts (LBOs) by private equity (PE) on peers in the same industry using data on US public‐to‐private LBO transactions between 1985 and 2016. We use a network‐based instrumental variable approach to account for potential endogeneity concerns. Our findings indicate that the LBOs by PEs matter for peer firms' performance and corporate strategy relative to nonpeer firms. Our study supports a learning factor hypothesis, but we find no evidence to support the conjecture that peers lose due to the increased competitiveness of the LBO target.

Cognitive load, social values and financial distress: drivers of restructuring decisions

PurposeThis study aims to analyze the effect of cognitive load and social value orientation on managers’ preferences when they face with two types of restructuring choices in financially distressed firms: the first belonging to the family of organizational restructuring (massive layoffs) and the second to the family of financial restructuring (debt increases).Design/methodology/approachThe authors investigate experimentally the impact of managers’ cognitive load and social value orientation on the decision to restructure leveraged buyout (LBO) firms in financial distress by using either massive layoffs or debt increases.FindingsBy investigating the impact of managers’ cognitive load and social value orientation on the restructuring decision of an LBO firm in financial distress, the research reveals that, on average, cognitively loaded managers prefer massive layoffs over increased debt levels. The massive layoffs seemingly provide a relatively easier way to avoid conflict with influential, residual claimants. In contrast, social value–oriented managers actively avoid massive layoffs and prefer to increase debt.Research limitations/implicationsThese results imply that the performance mechanisms emphasized to improve agency relations, for example, in LBOs, have their own limitations during periods of financial distress. This study shows that one of these limits is related to cognitive distortions and personality traits.Originality/valueIn this research, the originality lies in understanding how managers’ internal factors affect their restructuring decision-making, in the case of LBO firms in financial distress.

Social capital, syndication, and investment performance: Evidence from PE investing in LBOs

This study examines the influence of social capital on leveraged buyout (LBO) investments. Exploiting proprietary global private equity data at the investment-level for leveraged buyouts, we find that alumni of Harvard's MBA program are more inclined to co-invest and form syndicates in LBO with each another. The phenomenon of Crimson pairing manifests in deals that involve uneven investments in co-investor capital, necessitating trust to alleviate agency costs and enabling investors to diversify their portfolios. The outcome of Crimson pairing is an increase in value and investment returns relative to all other typical LBO syndication partnerships.

Vulture Funds, Cognitive Costs, and LBO Bankruptcies

The financial distress of companies subject to leveraged buyouts (LBO) might help explain their bankruptcy. The current research establishes a link between the presence of vulture funds and an increased probability of bankruptcy following LBOs. With an exploratory study, the author reveals that the characteristics of companies under LBO facilitate the actions of vulture funds, whose strategy is not limited to the use of discretionary control power but also extends to unconventional methods, such as media campaigns and other informal tactics. Such actions by vulture funds contribute to increase the chances of bankruptcy, through two main routes: different biases in valuation at each stage of action and residual cognitive costs. Notably though, the increase in cognitive costs created by divergences between managers and vulture funds is unrelated to managerial competence.

Wentai Technology Leveraged Buyout Case Analysis of Anshi Group

Wentai Technology Leveraged Buyout Case Analysis of Anshi Group

Pre-LBO Credit Market Conditions and Post-LBO Target Behavior

In the context of leveraged buyouts (LBOs), this paper empirically studies the relation between pre-buyout credit market conditions and the post-buyout behavior of target companies, employing a supervisory dataset to overcome limited data availability for post-buyout target financial information. We propose an LBO-specific measure of (changes of) credit market conditions---the short-term (6-month) change of credit spreads leading up to buyout close. Using this proposed measure, we show that loosening pre-LBO credit market conditions, which are related to higher buyout leverage consistent with the literature, are associated with poor post-LBO (operating) performance of the target company. These results support the narrative of agency costs of debt such as risk shifting and debt overhang but are inconsistent with theories of disciplinary effects of debt. We provide further evidence supportive of the theories of agency costs of debt and some results favorable to the risk shifting story.

The Harm and Regulation of High-leverage Multiple Behaviors in LBOs

In recent years, as the development of our capital market gradually tends to mature, the number of mergers and acquisitions (M&A) of all kinds of enterprises also begins to present an increasing trend. Leveraged buyout (LBO), as a very clever acquisition form, is favored by many enterprises. However, in the context of imperfect laws and regulations, enterprises and individuals make irrational behaviors driven by extremely high interests, and one of them is blindly raising leverage multiple in pursuit of returns, it has brought a bad influence on the market, enterprises, and individuals. To create a favorable business environment, measurements have to be taken to regulate the overhigh leverage of multiple behaviors in LBOs. The essay uses the method of case study and comparative study. The most typical LBO case will be presented as an introduction, and then some other good cases will be mentioned later to illustrate the characteristics of LBO and the harms of high multiple in LBO and so on. To compensate for the harms that high leverage multiple in LBO bring to the market, enterprises and individuals, several solutions have been raised, including clarifying the principle of good faith in MBOs, improving the system of regulatory rules for the capital market, optimizing the information disclosure system of leveraged buyouts and increasing punishment for illegal speculative activities. The detailed argument will be elaborated on later.

Thematic Investing with Big Data: The Case of Private Equity

Using natural language processing, we score companies based on the frequency with which news articles contain both their names and terms private equity and leveraged buy-out. An index is then created and can be updated seamlessly at high frequency. The weights are set as a function of the relative exposure to this theme. We add liquidity constraints to ensure minimal transaction costs. Even though the algorithm does not optimize on either return or correlation, this listed private equity index is highly correlated to commonly used private equity fund market indices: nearly 90% correlation with Burgiss LBO fund index. In addition, our index has similar returns as non-tradable Leveraged Buy-Outs (LBO) fund indices. Our approach can be generalized to many other investment themes.

Advantages and Disadvantages Analysis and Legal Risks of LBO

The leveraged buyout (LBO) is an important and genius operation in the field of mergers and acquisitions. Companies expand and optimize their performance with the help of LBOs. The market as well as the society can also benefit from LBOs. But however, all coins have two sides. There are a lot of negative cases that illustrate that the LBO is not an impeccable operation. Shareholders benefit can be harmed and there are insider buyouts when managers impose on their shareholders as they are privileged with their insider power. This paper is going to discuss the advantages and disadvantages of LBOs.

The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries

The Potential Contributions of Leveraged Buyout (LBO) to the Development and Integration of African Countries

Private Equity Leveraged Buyout Analysis: Evidence from Citrix Transaction

Evaluations of the leveraged buyout and the consideration of debt schedule are critical for private equity funds. Large amounts of debt can create value for a firm but increase the risk simultaneously. This paper describes the result of a specific transaction’s valuation based on the adjusted present value, the weighted average cost of capital method, and the equity cash flow valuation methods. The same results are presented by each method, but the interpretation can be quite different. Besides, the value creation to the firm through each variable in different methods and the validation steps are discussed. Furthermore, this paper presents the performance indicators: internal rate of return and cash on cash multiple. These results shed light on demonstrating the impact of tax shield and capital structure on the enterprise value, cost of equity, and cost of capital calculation.

Financialisation and the management of people: Are leveraged buyouts bad for intrinsic job quality?

AbstractThis paper provides the first nationally representative assessment of intrinsic job quality in leveraged buyouts (LBOs). We propose a workforce re‐contracting perspective, which views LBOs as having negative implications for some aspects of intrinsic job quality (job demands) but positive implications for others (job resources), and employee wellbeing and affective outcomes that are no different than in comparable non‐LBOs. Our empirical findings support this perspective. Nevertheless, we find some evidence that certain LBO types have more negative implications for specific elements of intrinsic job quality than others. However, our overall findings contribute towards studies suggesting that the impact of LBOs on employees is modest, while also highlighting the varying implications of different LBO types for employees.

Legal Risks and Regulatory Suggestions for Cross-Border Leveraged Buyouts

Leveraged Buyout (LBO), which emerged in the United States in the 1960s and 1970s, is a corporate acquisition method in which the acquiring party uses financial leverage to increase the debt-to-equity ratio in the purchase of the target company's equity. LBOs utilize the principle of financial leverage and have the dual characteristics of high risk and high returns. On the one hand, as a mechanism based on the market allocation of resources, LBOs affect the entire social and economic system, continuously promote the development and improvement of corporate governance systems and structures, and accelerate the progress of enterprises. On the other hand, it often has a high-risk nature, and the excessive use of leverage may cause financial disorder and turbulence in capital markets. Based on the typical case of Geely's acquisition of Volvo, a multinational LBO, as well as the relatively mature legal and regulatory practices in the United States, this article analyzes the problems existing in the LBO process, such as high leverage ratios and complex structures of acquisition funds, inadequate information disclosure, and difficulties in protecting the rights and interests of small and medium-sized investors, as well as the legal risks that may be faced by companies' financing, shareholder rights, and creditor rights. Suggestions are made from three aspects: emphasizing information disclosure, improving judicial remedies, and strengthening financing supervision.

Through Aristotelian Lenses, Potential Reforms of the Leveraged Buyout Model

The overall objectives of this article are to help the reader see and understand through Aristotelian lenses: (1) positive and negative aspects of the Leveraged Buyout (LBO) business model; and, (2) how LBO practices can be reformed so as to retain positives and reduce negatives. Aristotelian lenses considered are: wealth acquisition through wealth expansion, wealth creation, and wealth transfers; distributive and corrective justice; and, a dialectic analytic process of retaining positives, reducing negatives, and reforming. Key net positive wealth expansion aspects of the model are discussed with respect to: profitability for the owners, managers, and investors of LBO firms; potential productivity improvements on the cost and revenue sides; and, potentially greater credit availability. Negative wealth transfer and destruction aspects with respect to: a relatively high rate of bankruptcies in some countries and in economic downturns; LBO firm gains without responsibility for losses; wealth transfers from employees, creditors, ordinary vs “carried interest” taxpayers; and, damaged wealth expansion and creation capabilities of acquired organizations are discussed. Potential reforms that could reduce negatives, retain positives, and reform the model are discussed.

Prepacks as a mechanism for resolving financial distress: The evidence

Prepacks as a mechanism for resolving financial distress: The evidence

차입매수와 탐정의 역할 확대방안에 관한 연구

미국과 유럽, 기타 아시아에서도 차입매수를 통한 기업의 인수합병 이 증가하고 있으며, 우리나라에서도 점차적으로 증가하고 있는 가운 데 문제점도 노출되고 있다. 대법원의 경우 신한 사건에서 인수회사의 대표이사가 인수대상회사의 자산을 담보로 자금을 차입하여 인수하는 경우에, 피인수회사에게 담보제공으로 인한 위험부담에 상응하는 반대 급부를 제공하지 않았을 경우 이사의 임무위배행위로 인해 손해가 발 생했다며 이사에게 업무상배임죄의 형사책임을 적용했다. 기업인수합 병의 한 방법으로 이용되고 있는 차입매수는 형사법적으로 판단하는데 어떻게 적용할 것인가에 대한 논의는 기업의 입장에서는 중요한 과제 인 것이다. 차입매수는 미국에서 출발하여 유럽과 아시아로 전파되어 활발하게 전개되어가고 있으며, 기존의 형사법적인 제재보다는 민사법적인 제도 를 강화하여 규제를 하고 있으므로, 우리나라도 배임죄의 성립요건을 완화하여 형사법적인 제재를 자제해야 하는 가운데 기업의 일탈을 감 시해야 하는 의무도 있는 것이다. 그런 측면에서 본 논문에서는 형사 법적인 문제인 배임죄의 성립여부와 차입매수과정에서 기업의 일탈을 감시하며 건전한 기업문화 확립에 도움을 줄 수 있는 민간영역의 감시 기구인 탐정의 역할에 대해서도 살펴보고자 한다. 법적인 테두리안에 서 차입매수가 이루어질 수 있도록 외부의 민간차원의 전문가인 탐정 이 감시할 수 있는 문제를 검토하여 기업경영의 투명화와 투자자보호 에 관심을 가져야 할 것이다.

Worker Earnings Mobility and the Conception of Value in Private Equity Leveraged Buyouts

Over four leveraged buyout (LBO) waves since 1980, private equity firms restructured thousands of large U.S. businesses with tens of millions of employees. At the same time, earnings for most U.S. workers stagnated despite rising corporate productivity. While private equity proponents argue that LBOs increase corporate competitiveness and create shared value, LBO critics argue that workers often bear the cost of high LBO debt. I argue that two main conceptions of value in private equity leveraged buyouts - operational and financial - have different implications for worker earnings mobility. I use administrative data on hundreds of millions of U.S. workers to show that LBOs on average increase the earnings of more-educated workers and lower the earnings of less-educated workers. The large negative LBO effects appear in the riskier LBOs enacted at the peak of the LBO waves, when the cost of high-yield debt is low and creditors offer debt with lower restrictions on organizational behavior. Findings from worker-level difference-in-difference models support this argument. I show that the cost of high-yield debt predicts higher leveraged deals and I match LBO-acquired companies to non-acquired companies based on timing, capitalization, size, industry, stock market, earnings, and level of financial distress. This study develops the organizational theory of economic inequality by explaining how the different value conceptions of corporate restructuring have different impacts on worker opportunity. Management theorists should continue to study LBOs and other organizational restructuring processes that reassign corporate control to impact diverse stakeholder groups.

Workforce Trust in Leveraged Buyouts

Workforce Trust in Leveraged Buyouts