Over the last three decades, the number (enterprise value) of leveraged buyout transactions involving privately held targets has totaled about 10,013 deals ($855 billion), accounting for 46 % (21%) of the worldwide leveraged buyout market. Yet the vast majority of academic studies focus on the buyouts of publicly held targets. This paper investigates the motives and consequences of leveraged buyouts involving 169 private firms in the U.K. I find that private firms with large growth and investment opportunities seek partnership with private equity sponsors to change the ownership structure and capitalize on those opportunities: In contrast to the buyouts of public firms, private targets sponsored by private equity firms grow in size through larger investments in fixed assets and acquisitions subsequent to the buyouts. However, private targets undergoing leveraged buyouts without private equity sponsors do not experience substantial changes in ownership structure and do not increase in firm size and investments ex post. The evidence is consistent with the view that private equity sponsored leverage buyouts not only serve as an exit for owners, but also relieve private firms ’ investment constraint by diffusing ownership structure and providing financing for new investments and growth.

We investigate going private transactions in Europe examining both the market reaction around the acquisition announcement and the post-transaction performance. The existence of large controlling shareholders, in particular families, permits to examine going private deals initiated by the company’s controlling shareholder. We find that CARs around going private announcements are negatively related to the stake held by its largest shareholder. The market reaction around the going private announcement is also negatively related to the company’s stock price performance before the announcement, supporting the undervaluation hypothesis. When the largest shareholder, particularly a family, takes her firms private, this affects positively post-transaction operating performance. Conversely, firms taken private by new owners experience worse operating performance. We also compare UK to non-UK going private: UK deals have higher returns for target shareholders, but worse post-transaction performance. Using a LBO to delist the company impacts neither on abnormal returns nor operating performance. JEL Classification: G34

The views expressed in this paper do not necessarily reflect

Family business succession is often viewed by academics and practitioners as a critical step in the life of a firm: it can affect a variety of matters, ranging from its competitive potential and its hierarchy to its own capability to survive. This is particularly true in Italy, where firms are by and large small or medium, with no direct access to the capital market, and where many entrepreneurs who actively took part in the industrial development of the second half of the 20 th century are now giving up their jobs. In this paper we try to understand whether Private Equity can be an effective answer to this emerging issue or not. To this end, at this first stage of the research, we focused on those Italian deals where the Private Equity investor was heavily involved (meaning that it acquired at least a majority stake in the target family firm) and we examined the effect of the deal performances of firms (comparing the performance two years before and three years after the deal). The sample includes 21 of the 44 family business investor buyouts (FBIBO) carried out in Italy during the 1990s. The results are ambivalent. Some of the identified variables (such as Turnover, EBITDA, …) are not statistically significant, meaning that performance trends before and after the deal cannot be tracked back to the role of the Private Equity investor. Case study analysis thus

A secondary buyout is a leveraged buyout (LBO) where the buyout sponsor, who had previously taken control of a target through an LBO, sells the target firm to another private equity firm or to a financial sponsor. Secondary buyouts, as a fraction of all buyouts, have grown from 13 % in the 1980s to 35 % in the last five years. I find that, compared to first-time LBOs, secondary buyouts are priced at a premium that cannot be explained by the fundamentals of the target firms. The current wave of secondary buyouts does not appear to be driven by collusion on the part of private equity firms. I also find mixed evidence for the efficiency gains explanation, since the target firms show an increase in profits but a deterioration in profitability after the buyout. Instead, the evidence is most consistent with the notion that secondary buyouts are motivated by conditions in the capital markets. Specifically, firms are more likely to exit through secondary buyouts rather than through IPOs or sales to strategic buyers under certain conditions: when the equity market is ‘cold’, when the debt market condition is favorable, and when the selling private equity firms need to raise new funds.

This paper tests for changes in firms ' production and pricing decisions in four industries in which firms have sharply increased their financial leverage. The analysis of product price and quantity data show that industry product market decisions are associated with capital structure. In three industries, output is negatively associated with the average industry debt ratio. In the one industry which shows a positive association between output and debt ratios, rival firms have low financial leverage and entry barriers are relatively low. Analysis of executive compensation data supports the hypothesis that managers ' incentives to maximize shareholders ' wealth increase following recapitalization.

We explore the joint determination of product differentiation strategy and corporate leverage in a setting where (i) product differentiation is valued by customers; (ii) debt is necessary to discipline managers; and (iii) liquidation is costly for customers, in particular, when products are highly differentiated from competitors ’ products. We show that when managerial incentive problems call for high leverage, firms position their products closer to competitors to reduce deadweight costs customers incur in liquidation. We discuss our findings in light of case study evidence.

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Hendershott and Jo thank the Dean Witter Foundation for financial support. Choosing an Organizational Form: Leveraged Buyouts versus Leveraged Recapitalizations This paper investigates the economics of highly leveraged transactions and what determines firms' choice of an organizational form by documenting differences between 106 firms that undertook leveraged buyouts (LBOs) and 41 firms that implemented leveraged recapitalizations (LRs) during the period 1985-1990. We find a negative relation between the probability of choosing a LBO over a LR and two measures of potential efficiency improvements, profits per dollar of book assets and profits per employee. However, we discover a positive relation between the propensity of choosing a LBO and three measures of managerial power; insider ownership, the absence of block ownership, and the absence of independent outside directors on the firm's board. Additionally, we find that a prior takeover threat increases the likelihood of a LR. Overall, we interpret these results to mean that both efficiency improvement concerns and managers ' personal incentives drive a firm's organizational structure choice in highly leveraged transactions.

Timely Responses by Market Participants to Divergent Financial Rewards Boom and bust cycles in financial markets have largely been attributed to irrational investor behavior and labeled overheated markets. We explore the roles of underwriter and investor financial incentives and the speed of information revelation in overheated markets. Because underwriter profits are transaction-driven, they have incentives to bring deals to market, regardless of investor profitability, as long as the profitability from facilitating transactions outweighs any adverse impact on reputation. Investors, who learn about the value of an innovation by observing the short and long-term outcomes of past deals, may commit capital based on the superior performance of past deals even though current deals are no longer profitable, because the long-term outcomes of current deals have not yet been realized. We find empirical support for this rational explanation of overheating using roll-ups in the 1990s. What appears to be investor irrationality may be instead investors receiving, and therefore acting, on information with a lag. Our results suggest that markets that are labeled overheated ex post may not appear so at the time of investment. “It’s the best and worse of capitalism. Capitalism is herd mentality…What people don’t understand is what happens the second, third or fifth year out…What happens is, some of these businesses are going to blow up. ” 1