Leveraged Buyouts of Private Companies

Leveraged Buyouts of Private Companies
Ji-Woong Chung 1
Ohio State University
JOB MARKET PAPER
December 10, 2009
Abstract
Over the last two decades, the number (enterprise value) of leveraged buyout transactions involving
privately held targets totals 10,013 ($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 for leveraged buyouts involving privately held targets. I find that,
unlike buyouts of public firms, private targets sponsored by private equity firms grow in size by
increasing capital expenditures as well as acquisitions subsequent to the buyouts. Privately held targets
bring in outside managers and continue to increase debt financing when sponsored by private equity
firms. However, private firms undergoing leveraged buyouts without private equity sponsors do not
experience substantial changes in firm size and investments. The evidence suggests that private equity
firms facilitate private targets’ growth by alleviating targets’ investment constraints.
1
Contact information: Department of Finance, Fisher College of Business, Ohio State University, Columbus OH
43210; E-mail: chung_303@fisher.osu.edu. Part of the paper was conducted while I was visiting the Swedish
Institute for Financial Research (SIFR). I am grateful for valuable comments and suggestions from Ulf Axelson, Jia
Chen, Isil Erel, Rose Liao, Jongha Lim, Bernadette Minton, Berk Sensoy, Hyun-Han Shin, Léa Stern, René Stulz,
Jennifer Sustersic, Yingdi Wang, and Mike Weisbach, Scott Yonker as well as the seminar participants at Ohio State
University and the 2009 FMA Doctoral Student Consortium. I also thank the Dice Center for Financial Economics
for financial support and Soyeon Kim and Jinho Jung for assisting data collection.
1
This paper examines the effects of leveraged buyouts on the investment and performance of
privately held targets. The leveraged buyout market for privately held firms is large. Over the last two
decades there have been 10,013 acquisitions of private firms through leveraged buyouts, for an aggregate
deal value exceeding $850 billion (Strömberg, 2007). 2 Despite the size of this market, academic studies
have devoted little attention to private-to-private transactions.3 These private-to-private leveraged buyouts
are distinctively different from public-to-private buyouts, where the reduction of agency costs of free cash
flows (Jensen, 1986, 1989) largely motivates the transactions, because there is virtually no separation of
ownership and control in private firms.
Previous studies document that firms with abundant free cash flows and low investment
opportunities are more likely to engage in leveraged buyouts (Lehn and Poulsen, 1989, Opler and Titman,
1991, Long and Ravenscraft, 1993), and that targets reduce capital expenditures and actively sell assets or
divisions after buyouts (Kaplan, 1988, Smith, 1989, Wiersema et al. 1995, Dennis, 1994, Magowan,
1989). 4 These findings are typically interpreted as being consistent with the view that buyouts reduce free
cash flow problems by reversing previously made inefficient investments or acquisitions.
However, the empirical evidence in this paper suggest that agency costs of free cash flows do not
explain the leveraged buyouts of privately held companies: Ownership appears to be highly concentrated
in private firms prior to buyouts, making it unlikely that private targets suffer from the same kinds of
agency problems as public companies. Also, privately held targets substantially grow after buyouts:
assets, sales, capital expenditures, and the number of employees all increase. Overall, the evidence
suggests that leveraged buyouts of private firms alleviate investment constraints rather than reversing
inefficient investments.
2
By comparison, during the same period, the number of buyouts of publicly traded firms is 1,398 with a total
enterprise value of approximately $1.1 trillion.
3
This undue emphasis on public-to-private buyouts may be ascribed to several high profile deals involving public
companies such as RJR Nabisco ($31.1b in 1988), Beatrice ($6.1b in 1985), and, more recently, HCA ($32.7b in
2006), and TXU ($43.8b in 2007) and to the lack of publicly available financial data for privately held targets and
“gone” private companies through leveraged buyouts in the U.S.
4
Also managerial compensation is restructured to align the interests of managers with owners, and high leverage
and close monitoring by investors reduce inefficient resource wastes (Baker 1992, Baker and Wruck, 1989). As a
result, after leveraged buyouts, operating performance and plant productivity improve (Kaplan, 1988, Smith, 1989,
Litchenberg and Siegel, 1989, Muscarella and Vetsuypens, 1990, among others).
2
In private companies, entrepreneurs or owners usually serve as the managers of their company, or
the ownership structure is highly concentrated in the hands of a few, such as founders, angel investors,
and venture capitalists. These owners perform close monitoring on the management and managerial
incentive mechanisms are tightly structured to protect owner wealth from manager expropriation (e.g.
Sahlman, 1990, Kaplan and Strömberg, 2003). Therefore, the agency problems associated with incentive
misalignment between owners and managers are unlikely to be found in private companies.
Consequently, the elimination of agency costs of free cash flows (Jensen, 1986, 1989) is less likely to be
an important reason for leveraged buyouts for a private company as it is for a public firm.
Private firms, however, tend to have limited or costly access to public resources imposed by
concentrated ownership structure and information asymmetry. All else equal, when facing an investment
opportunity, managers of private companies are less able or willing to implement the investment. Owners
with substantially undiversified wealth tied up in the firm may not want the extra risks associated with the
new investment. Further, the existing managers may not possess the intimate knowledge and expertise
necessary to execute the new investment, and the firm may not have the financial resources to take
advantage of new investment opportunities. Often owners of private firms tend to have different goals,
such as keeping the business stable, maintaining stable income flows, and providing employment
opportunities for their descendants.
Private equity firms, through leveraged buyouts, can alleviate these investment constraints by
providing the owners with a whole or partial exit (thereby lowering the ownership of and reducing the
risk exposure to the owners). Private equity firms sponsoring these transactions reduce information
uncertainty of target firms through due diligence and their reputation in the capital markets. Private equity
firms also import advanced management skills (e.g. operational knowledge and expertise on the corporate
control market) and industry and regional networks into the target companies. In addition, private equity
firms, being professional investment firms which manage several portfolio companies, are more risk-
tolerant than the individual owners.
3
In contrast, a public company taken private through a leveraged buyout is less likely to be
resource constrained. One of the main reasons that a firm goes public is to tap the public capital market
and to exploit current and future investment opportunities (e.g. Kim and Weisbach, 2007). Hence, a
public company may pursue a leveraged buyout and go private because it no longer needs public
resources. Public status also provides an opportunity to engage in mergers and acquisitions (which is a
major investment for a company), either by creating shares that serve as a currency for acquisitions (Brau,
Francis, and Kohers, 2005, Brau and Fawcett, 2006) or by establishing a market value for the firm
(Zingales, 1995, Mello and Parsons, 2000, Brau and Fawcett, 2006). These theories suggest that a firm
without large growth investment opportunities, without a need for large amount of capital, and with no
demand for corporate control activities will be more likely to go private.
In sum, consistent with the traditional argument in support of leveraged buyouts, publicly held
targets will try to increase firm value by eliminating inefficiencies arising from agency problems after a
leveraged buyout. In contrast, financial buyers of private targets will try to alleviate investment
constraints and capitalize on growth opportunities through a leveraged buyout.
I investigate a sample of 266 buyouts in the U.K. between 1998 and 2007, 170 of which involve
privately held targets. The U.K. market provides two advantages: first, the stringent disclosure and
financial reporting environment in the U.K. allow observation of the characteristics of privately held
targets and what these companies actually “do” in the post-buyout period under private ownership. 5
Second, the U.K. leveraged buyout market is, after the U.S., the second largest in the world, making it
possible to examine a large sample of buyouts.
As noted above, in the sample of privately held targets, I find that the average (median)
ownership of the largest owner prior to buyout is 86% (100%) and the vast majority (97%) of these
owners are also managers of the companies. I also find that, after buyouts, privately held targets, unlike
publicly traded targets, increase capital expenditures and make substantial acquisitions. For example,
5
U.K. company laws require all limited liability companies (both private and public) to file periodic reports with the
Companies House. See the U.K. Companies House for the Companies Act.
4
from one year prior to the third year after the buyout, the median value of industry-adjusted capital
expenditures to sales ratio increases by 46% for private targets. In contrast, the industry-adjusted capital
expenditures to sales ratio decreases by 4% for public targets over the same period. Under leveraged
buyout ownership, the cash outflows (inflows) associated with acquisitions (disposals) to tangible fixed
assets ratio is 0.644 (0.000) in private targets and 0.039 (0.026) in public targets.
To further understand why private targets grow after leveraged buyouts, I examine management,
financial, and ownership characteristics both before and after the transactions. I find that when a private
equity firm sponsors a buyout, the target’s post-buyout growth is substantial. However, when previous
owners transfer ownership to new owners without private equity sponsors, the targets do not experience
unusual growth. I also find that when a private equity sponsor becomes the controlling shareholder, the
changes in management and ownership structure are greater. In sponsored buyouts (non-sponsored
buyouts), about 66% (50%) of managers are replaced after the completion of leveraged buyouts, and the
number of shareholders increases by five (two).
I also find that targets of private equity sponsored buyouts are more profitable and experience
faster growth prior to buyout than targets of non-sponsored buyouts. Overall, the evidence suggests that
private equity firms acquire well-performing private firms, and provide capital and resources to facilitate
growth and investments.
To further examine whether a target’s growth is more of a selection effect or a treatment effect, I
compare the investment and growth of the target firms with those of a control sample of non-target firms.
Using propensity score matching, I construct a control sample of non-target firms which are similar to the
target firms in terms of firm size, growth, and profitability, three important determinants of the likelihood
of being leveraged buyout targets. Using this matched sample, I find that private-equity-led targets
experience substantial growth even after adjusting for similar non-target private firms. This finding
implies that even though private equity firms select targets with growth potential, they do help target
firms grow and expand post-buyout.
5
I also examine the operating performance of private targets post-buyout, to see how the targets’
growth strategy affects performance. I find that private targets without private equity sponsors experience
a large increase in operating income: industry-adjusted EBITDA is 65% higher in the second year than it
was one year prior to buyout. However, targets with private equity sponsors do not experience much
increase in operating performance: industry-adjusted EBITDA increases by 5% during the first two years
post-buyout. The ratio of operating income to operating assets drops by 31%— a figure large in
magnitude, but not statistically significant. This pattern implies that buyouts of private firms without
private equity sponsors lead to control changes and improved efficiency. In contrast, buyouts with private
equity sponsors result in injections of capital into the targets, leading to increased growth but not
improved margins. This deterioration of operating efficiency could be the result of worse investments on
the part of private equity firms. However, it could also be that the targets are making long-term
investments or that profitability decreases as the targets increase/optimize firm size and investments. The
evidence in this paper cannot distinguish between these two hypotheses.
The paper proceeds as follows: Section 1 describes data sources and sample selection. It also
presents summary statistics on the deal characteristics of private and public target firms. Section 2
examines private target characteristics and contrasts them with public targets and industry-peer private
firms. Section 3 investigates post-buyout restructuring processes and considers what factors are
associated with the post-buyout investment policy of private targets. Section 4 considers the effect of the
presence of private equity firms on targets’ investment and growth. Section 5 studies the operating
performance of target firms after buyouts, and Section 6 concludes.
6
1. Data and summary statistics
1.1. Data sources and some institutional background
Leveraged buyout transactions are collected from Zephyr; 6 deal information (deal date, deal type –
public-to-private or private-to-private, etc.) is cross-checked using SDC Platinum and Capital IQ. I select
completed management buyout, management buy-in, and institutional buyout deals with an acquired stake
of at least 50% and target companies that are located in the U.K. The total number of such deals is 4,652.
As a comparison, during the same period, the number of completed leveraged buyout deals where the
targets are located in the U.K. and the stake owned after buyout is at least 50% is 4,386 in the SDC
database; Capital IQ contains 3,322 such deals from 1997 to June 2007. Therefore, Zephyr’s deal
coverage appears to be equivalent to that of other databases typically employed in academic research.
Appendix I provides summary statistics on leveraged buyout transactions. Panel A presents the
distribution of the number of buyouts by transaction year and target status. The buyouts of independent
private firms (“Private”) account for about 40% of the U.K. leveraged buyout market, after divisional
buyouts (“Divisional,” 41%). The buyout of public firms represents only a small fraction, 4.9%. However,
the median deal value of private targets is £10 million whereas that of public targets is £74.6 million.
Therefore, while public firm buyouts are small in number, they account for 29% of the market in value.
Private firm buyouts make up 11.2%, less than half the size of public firm buyouts. However, note that
only 37.8% of private buyouts report deal values, whereas all public buyouts do so. If we assume that the
size of unreported deals of private buyouts is the same as for reported deals, the total deal value of private
firm buyouts is about £69 billion, approximately the same as the total deal value of public firm buyouts.
6
Zephyr, which is published by Bureau van Dijk, provides information on mergers and acquisitions, IPOs, and
private equity deals worldwide since 1997. As of January 2009, it contains information on 703,327 deals. Zephyr
does not cover deals “involving equity stakes of less than 2 percent, unless the consideration for the stake is greater
than GBP 15 million (i.e. where the market capitalization of the target is over GBP 300 million). When the bidder is
an investment trust or pension fund, then the threshold is raised to 5 percent. If the purchase is considered to be
significant, then it is entered regardless of the deal value.”
7
Although I do not attempt to explain the difference in deal pricing across target status in this
study, I briefly present the information on deal value multiple. 7 Deal value multiple on EBITDA is
highest among secondary buyout deals, 10.61, and lowest among distressed buyouts, 6.11. Deal value
multiples are slightly lower in private buyouts than public buyouts: 7.87 vs. 7.92 for private and public
targets, respectively.
Panel B reports the distribution of leveraged buyout transactions by transaction type. The most
frequent form of buyout (66.5%) is a “management buyout” (MBO) where the existing managers of a
target company purchase a controlling interest from existing owners. The next most popular form of
buyout (22%) is an “institutional buyout” (IBO), in which private equity firms acquire a target company
from previous owners and, often, the target's management takes a relatively small stake. In a management
buy-out, the incumbent managers, as a bidding group, take an equity stake. In the case of an institutional
buy-out, managers receive equity ownership as part of their compensation packages (Renneboog and
Simons, 2005). A “management buy-in” (MBI), where an outside management team takes a majority
stake in the target company and often replaces existing managers, accounts for 9.4% of the buyout market.
Finally, a “buy-in management buyout” (BIMBO) indicates that an existing management team, along with
outside managers, buys out a company; this type of deal represents about 2% of the market. About half of
all buyouts are sponsored by private equity funds. In terms of deal value, institutional buyouts dominate,
accounting for 81% of the market. Management buyouts follow at 17%. The median deal value of
institutional buyouts is £62 million which is substantially larger than that of transactions led by incumbent
or outside management teams. This pattern is not unexpected since large public firms usually complete
buyouts with private equity partners.
Pre- and post-buyout financial information on target companies is from three sources: Amadeus,
Worldscope (for public targets), and from the annual accounts filed with the Companies House. This
process is complicated by substantial changes in corporate structure that occur after buyouts. Figure 1
depicts a typical leveraged buyout transaction. Usually one or more acquisition vehicles (e.g. NewCo and
7
Officer (2006) and Bergeron, Schlingemann, Stulz, and Zutter (2009) touch on this issue.
8
TopCo) are established one on top of each other to complete the transaction. After NewCo is incorporated
by management and/or private equity firms, it acquires Target and its subsidiaries. TopCo is also
concurrently created to acquire NewCo. After the buyout, these acquisition vehicles continue to serve as
holding companies of Target and its subsidiaries. 8
In the U.K. when one company becomes a wholly owned subsidiary of another, the subsidiary
does not have to prepare consolidated financial statements (in accordance with Section 228 of the
Companies Act in 1985). In a leveraged buyout, when a target company has significant subsidiaries and
becomes, again, a subsidiary of an acquisition vehicle, the target’s financial statements do not usually
include its subsidiaries’ financial information. Therefore, a target’s pre-buyout financial statements and its
post-buyout financial statements can be significantly different, even though the entity is materially
unchanged throughout the process. Hence, for each buyout transaction, I trace and identify the target’s
parent company. Because their annual accounts consolidate the target and its subsidiaries’ financial
information, I use the parent company’s annual account as a comparison against the pre-buyout target’s
annual account.
1.2. Sample selection
From 4,652 initial deals, I exclude from the analysis target companies without a U.K. registration number,
leaving 3,706 deals. I drop divisional buyouts since complete accounting data is rarely available for
divisions of larger corporations (1,313 deals). Similarly, I also eliminate distressed buyouts (144 deals):
accounting data is not usually available once a firm files bankruptcy. I do not study secondary buyouts in
this paper (386 deals), since the motive for these deals is likely to be very different from that of buyouts
of independent private firms. I exclude recent deals (those completed in 2008 and 2009) since I need to
examine target firms’ post-buyout investment and performance (203 deals). This selection process results
8
There are several reasons for the establishment of multiple acquisition vehicles. “When there are several layers of
financing, a number of acquisition vehicles are formed into which corresponding financial instruments are invested.
Senior lenders take comfort by having subordinated or equity invested into vehicles further away from cash
generating target group. Effectively, this structure establishes ‘structural subordination’” (See Speechly (2008) for
further discussion on this issue).
9
in a sample of 1,660 buyout deals from 1998 to 2007. Finally, I randomly choose 300 target firms and
manually collect accounting and ownership data from annual note and annual return documents. In this
process, I exclude 34 cases where accounting data is insufficient. 9
The distribution of the final 266 leveraged buyouts from 1998 to 2007 by calendar year is
reported in Table 1. Public-to-private transactions account for 36% and private-to-private deals make up
the rest. The number of transactions is more concentrated towards the end of the sample period, peaking
in 2006. The median deal values involving private and public companies are ₤11.98 and ₤55.77 million,
respectively. The total transaction value from 1997 to 2007 is ₤ 42.9 billion, amounting to about 20% of
the total deal value of the buyout market in the U.K. during this period. Again, these values are the lower
bounds because only 70.68% of 266 buyouts provide deal value information through Zephyr, SDC, or
Capital IQ. For private company buyouts, 54.12% of the 170 transactions disclosed deal value
information. About 65% of the deals were sponsored by private equity funds.
3. Pre-buyout characteristics of target firms
3.1. Pre-buyout ownership characteristics of privately held targets
I first document the ownership structure of privately held targets to see whether and the degree to which
ownership is concentrated. Table 2 details the ownership structure of private targets prior to buyout for
the subsample of 141 deals where ownership information can be identified from the firms’ annual
returns. 10 As expected, ownership is highly concentrated among a few shareholders. The average
(median) number of shareholders of private targets is 3.51 (2). Thirty-one percent of private targets are
entirely owned by a single owner. The average (median) ownership of the largest owner is 86% (100%).
9
Not all companies provide detailed annual accounts: public companies disclose a substantially greater amount of
information than private companies. Small or medium-sized private companies can provide abbreviated accounts
which contain only minimal company and financial information (in accordance with Section 248 of the 1985
Companies Act). Also cash flow statements are not filed if the company is a wholly owned subsidiary of another
company (Financial Reporting Standards 1).
10
All companies in the U.K. must submit this annual return form (Form 363a prior to October 2009) to Companies
House each year: It provides a snapshot of general information about the company, including the details of key
personnel, the registered office, share capital and shareholdings.
10
97% of the largest owners are also directors (chairman or managing director) of their firms. Therefore, the
majority of private target firms qualify as Jensen-Meckling’s (1976) zero-agency cost firms.
3.2. Pre-buyout financial characteristics
3.2.1 Private targets vs. public targets
In this section, I examine pre-buyout financial characteristics of private targets to see what kinds of
private firms are more likely to be targets of leveraged buyouts. Public firms which are vulnerable to
agency problems associated with free cash flow are more likely to engage in leveraged buyouts (Lehn and
Poulsen, 1989, Opler and Titman, 1993). Since private targets are likely to suffer less from agency
problems and more likely to face investment constraints, I expect to see systematic differences in
investment opportunities between private targets and public targets prior to buyout. On the other hand,
capital structure and the performance of private targets can be similar to those of public targets as both
types of firms should be well positioned to take high leverage.
In examining the characteristics of target firms, I contrast them with industry peer non-target
firms. Peer companies are constructed as follows: first, from all U.K. companies in Amadeus, I select
firms that provide consolidated financial statements. I exclude firms where only unconsolidated
statements are available because such statements do not provide a complete view of the business. Next, I
match each firm-year of leveraged buyout firms with peer firms in the same industry defined by two-digit
SIC codes.
Table 3 reports summary statistics of financial characteristics for public and private target firms
prior to the buyout. Not surprisingly, private targets are considerably smaller and younger than their
public counterparts. At the end of the fiscal year preceding the year of the leveraged buyout, all firm size
measures (total assets, sales, property, plant, and equipment (PPE), and the number of employees) are
greater in public firms than in private ones. Private targets are about half the size of peer private firms and
slightly older than peer firms (1.5 years). Profitability and growth measures suggest that private targets
outperform both their peer private companies and public target firms in the period preceding the buyout:
11
private targets’ operating income and EBITDA far exceed those of peer private companies. The operating
income to sales ratio of private targets at the fiscal year-end prior to buyout is 0.09 and the median of
operating income to sales ratios of peer private firms is 0.03. In addition, the EBITDA to sales ratios of
private targets and peer private firms are 0.11 and 0.04, respectively. Both differences are statistically
significant at the 1% level. Private targets also hold more cash than peer firms: cash holding to sales ratios
are 0.13 and 0.04, respectively. In addition, private targets grow faster than peer companies in terms of
sales growth from year -2 to year -1 (0.13 vs. 0.05). With regard to capital structure, private targets are
less leveraged than their peer private firms before the buyout transactions: total debt to sales ratios are
0.26 and 0.37, respectively.
In sum, private targets are considerably different from both their peer private firms and public
targets. After industry adjustments, private targets are not significantly different from public targets in
terms of firm size, leverage, and capital expenditure. However, after industry adjustments, private targets
are more profitable and grow faster than public targets.
3.2.2 Determinants of the likelihood of being a target
I examine the firm characteristics of target and non-targets in a multivariate setting. I create a control
sample of private and public firms that did not engage in leveraged buyouts and estimate the following
logistic regression to predict the likelihood of being a leveraged buyout target with targets and control
firms.
The dependent variable is a binary variable equal to 1 for target firms and 0 for control sample firms. The
logit regression is estimated for two samples of firms: private firms (column (1)) and public firms
(column (2) in Table 4). I use sales growth and current capital expenditures to proxy for investment
opportunities. I normalize capital expenditures (CAPEX), EBITDA, and total debt by sales. Since targets
12
of leveraged buyouts should take substantial leverage, targets’ profitability, measured by EBITDA, and
leverage may be important determinants of leveraged buyouts.
The multivariate results are reported in Table 4. The results show that public firms with high cash
flow and low capital expenditures are more likely to undergo leveraged buyouts. This result is consistent
with the view that mature firms with abundant free cash flow and little need for further investments and
expansion are more likely to be targets of leveraged buyouts. Similarly, private firms with high profits are
more likely to engage in leveraged buyouts. Unlike public firms, however, private targets of leveraged
buyouts have larger sales growth and capital expenditures than peer non-target private firms. In addition,
private targets are under-utilizing debt capacity (negative coefficient of total debt to sales), which implies
that leveraged buyouts are more attractive for under-leveraged private firms.
In sum, the results suggest that private firms with larger investment and growth opportunities as
measured by sales growth and capital expenditures are more likely to be targets of leveraged buyouts,
whereas public firms are more likely to undergo leveraged buyouts when they do not have much growth
opportunities.
4. Post-buyout ownership structure, investment, and performance
4.1. Ownership structure
To see whether leveraged buyouts reduce ownership concentration in privately held targets, I examine
how ownership structure changes after leveraged buyout transactions. In Table 2, I also report changes in
the number of owners and the ownership of departing owners. There is a substantial change in the
ownership structure. The average (median) number of shareholders increases from 3.51 (2) to 7.33 (6).
The average (median) ownership of the largest owner-managers drops from 86% (100%) to 7% (0%). In
an unreported table, I find that 80% of the largest owner-managers leave the management and 71% of
owners completely liquidate their ownership through leveraged buyouts.
In addition, the incoming management almost always includes existing managers of the target
firms. In 8 cases (4.7%), incoming managers are family successors of the previous owner-managers.
13
Twenty-three transactions (13.6%) are buy-in management buyouts where the incumbent management
joins with outside managers to buy out the target. And nine transactions (5.3%) are classified as
management buy-ins, with outside managers leading the buyout transaction. However, even in a
management buy-in, the existing management team is not completely replaced. Even though existing
management may not be involved in the transaction, they continue manage the company even after the
buyout.
Though I cannot directly observe why the owner-managers would want to exit the business, a
modest fraction (23.5%) of them is above 65 years of age, which is suggestive of retirement. In the
transactions, ownership is transferred to a larger number of shareholders, including existing managers and
private equity firms. This change in the ownership structure is distinctively different from the change in
public firms undergoing leveraged buyouts, where, not surprisingly, ownership becomes more
concentrated.
4.2. Firm size, capital expenditure, and acquisitions and disposals
If private firms face investment constraints which can be alleviated by a leveraged buyout, we expect to
observe increases in firm size and investment post-buyout. Table 5 provides summary statistics for
changes in firm size and capital expenditure from the two years preceding the buyout to three years
afterwards for private and public targets.
Measuring firm size surrounding the time of a leveraged buyout is complicated due to the fair-
value adjustment to the book value of assets. Current assets including stocks (inventories) and creditors
(account payable) are fair-value adjusted upon completion of the buyout. Also, typically, positive
goodwill is generated to reflect the purchase price paid for the target’s assets (as a result, intangible fixed
asset size increases) and, subsequently, these write-ups are depreciated or amortized over the ensuing
years.
Therefore, to make a fair comparison between assets in the pre-buyout period and those post-
buyout, I adjust the book value of total assets by subtracting write-ups and goodwill generated at the time
14
of the buyout transaction. One limitation of this approach is that the size of the assets after buyout may be
understated. Since write-ups and goodwill are depreciated or amortized after buyouts, subtracting write-
ups and goodwill generated at the time of the transaction from the book value of assets at each fiscal year-
end will lead to an underestimation of the book value of assets. Re-adding depreciation and amortization
to the book value of assets in each year will not alleviate this concern, because depreciation and
amortization also include assets not associated with write-ups and goodwill due to the buyouts. Hence, to
give as fair a view as possible, I also provide other measures of firm size, such as tangible fixed assets
(PPE), sales and the number of employees.
Table 5 reports that private targets show statistically significant increases in total assets, sales,
and tangible fixed assets. For example, from year -1 to year +1, industry-adjusted sales and tangible fixed
assets of private targets increase by 17% and 18%, respectively. Public targets, on the other hand, reduce
firm size. Industry-adjusted sales and tangible fixed assets decrease by 22% and 21%, respectively, during
the same period.
Capital expenditures are the net cash flows from the purchases and sales of fixed assets. Private
targets significantly increase capital expenditures, especially during the first year post-buyout, whereas
public targets reduce investments on fixed assets, on average. During the first year post-buyout, industry-
adjusted capital expenditures of private targets increase by 51%, while those of public targets decrease by
49%. The industry-adjusted capital expenditures to sales ratio also increases by 7% in the first year, 15%
in the second year, and 46% in the third year following buyouts among private targets. This finding is in
contrast with that of Kaplan (1989) and Smith (1990). Kaplan (1989), with a sample of 48 public targets,
documents that the industry-adjusted capital expenditures to sales ratio decreases by 16.7%, 16.8%, and
25.6% respectively for years +1, +2, and +3 compared with year -1. He interprets this finding as being
consistent with reduced agency costs of free cash flow. The difference in post-buyout investment
behavior between private and public targets suggests that private firm buyouts occur for very different
reasons than those of public firms: leveraged buyouts reduce inefficiencies of private targets arising from
investment constraints and those of public targets stemming from free cash flow problems.
15
Many studies examine whether leveraged buyouts benefit investors at the cost of employees
(Shleifer and Summers, 1988, Kaplan, 1989, Lichtenberg and Siegel, 1990, Davis et al., 2008). In general,
researchers find that employment grows less than other peer firms (Kaplan and Strömberg, 2008). This is
partially true in my sample of leveraged buyouts. The industry-adjusted number of employees in public
targets at year +3 is 39% lower than it is at year -1. In contrast, private targets undergo substantial
increase in employment. The industry-adjusted employment grows by 26% from year -1 to year +3.
Though prior studies on the effect of leveraged buyouts on employment generate somewhat mixed results,
it appears the buyouts substantially increase employment for private targets albeit the industry-adjusted
wage per employee decreases post-buyout as I show in Table 14.
Finally, to see the extent of the acquisitions and disposals activities of target companies, I
compute the sum of all cash outflows (inflows) associated with acquisitions (disposals) from the time of a
leveraged buyout to the exit (when the firm exited private equity ownership) or to the most recent fiscal
year, and divide this sum by PPE at the end of the fiscal year prior to buyouts. Importantly, I exclude cash
outflows associated with the leveraged buyouts. The intensities of acquisitions and disposals activities are
estimated by the following measures:
Table 6 presents the results. The median acquisition-related cash outflow to PPE ratio of private targets is
0.66 and that of public targets is 0.043; the difference is statistically significant at the 1 percent level.11 In
addition, the median disposal-related cash inflows to PPE ratios are 0.00 and 0.017 for private and public
targets, respectively. Therefore, private targets engage in active add-on acquisition activities after the
buyout while public targets do not.
The overall evidence in this section shows that private targets grow substantially post-buyout
through larger investments and acquisitions. This finding is distinctively different from the post-buyout
11
I have not yet examined acquisition and disposals activities of target firms prior to buyouts.
16
restructuring and value creation process involving publicly held targets (Kaplan, 1988, Smith, 1989,
Wiersema and Liebeckind, 1995, among others), and supports the view that leveraged buyouts alleviate
the investment constraints of privately held targets.
4.3. Analysis of Deal rationales
For a subsample of 113 deals which involve privately held targets, I collect deal rationale information
though Zephyr and the Lexis-Nexis News Search. These deal rationales are comments made by managers
of targets, acquirers, or equity sponsors on the completion of transactions. Typically, these comments
contain information about the motives for and goals in completing the deals and the future prospects of
the target companies. Therefore, from this information we can infer deal participants’ motivations for the
leveraged buyout. Of course, these comments tend to be optimistic about targets’ future performance
since deals would not have otherwise been completed. Also the motivation for the deal and the future plan
expressed in deal rationales may not coincide with the actual restructuring process after buyouts. Despite
these caveats, it is worthwhile to analyze what deal participants have to say about why they sell and buy
target companies and what the buyers intend for the target companies. This analysis will complement the
earlier quantitative analysis.
The comments on deal rationales are qualitative information where some subjective judgment is
called for in interpreting the comments’ implicit meaning. In 26 cases, deal rationales do not provide clear
ideas about the grounds and future plans for target companies. Examples of this kind include: “We firmly
believe that the company will now benefit from this buy-out,” (Rite-Vent Ltd.) “It is pleasing to have
worked with local professionals to complete the transaction,” (MWL Print Group Ltd.) and “We believe
the deal which has been completed provides an excellent platform for … future development” (SHG
Opportunity Management Ltd.).
In 61 cases (61/87≈70%), managers (of the target company or sponsors) specifically mention that
they will expand or grow the target companies through geographical expansion plans (14%), new
investments plans (19%), and acquisitions plans (11%). The remainder simply state that managers intend
17
to expand and grow the target businesses. See Appendix II for examples of deal rationales listed
according to different future plans.
Overall the evidence suggests that the buyers of private targets seem to have a clear intention to
grow and expand the business post-buyout.
4.4. Median regression of firm growth on firm characteristics
In this section, I investigate what factors explain private targets’ growth after the buyout. I consider
several potential determinants of the post-buyout growth.
• Time-varying investment opportunities: It could be that new investment opportunities simply
arrived after the buyout. I use industry peer firms’ growth and investments to account for this
effect in accordance with the assumption that peer firms share similar investment opportunities.
• Managers’ competence: Incoming owner-managers may be more able to identify new investment
opportunities. To address this possibility, I examine whether management changes are associated
with the greater post-buyout growth.
• Managers’ risk attitude: Incoming managers can be more risk-tolerant, thereby making more
risky and larger investments. I consider the ages of departing and incoming managers: if younger
managers are more risk tolerant than older managers, I expect that a target’s growth will be more
substantial as younger managers are joining the target post-buyout. I also consider whether
private equity firms are sponsoring the transaction. As private equity firms, being professional
investment firms, manage a diversified portfolio of companies, I thus expect that such sponsors
would be more risk-tolerant than individual owners.
• Ownership concentration: I examine whether the change in ownership concentration is associated
with targets’ growth. The potential under-diversification of owners’ wealth can lead to owners’
risk aversion and under-investment (Fama and Jensen, 1985). Hence, if owners can diversify their
18
personal wealth through a leveraged buyout (as shown in Section IV.1), it is likely that the
reduction in ownership concentration will be associated with post-buyout growth.
• Private equity sponsors: Private equity firms import advanced management skills (e.g. operational
knowledge and expertise on the corporate control market) and industry and regional networks
into the target companies. Hence, the presence of private equity sponsors is likely to be related to
targets’ growth.
I estimate the following median regression to find which factors are associated with post-buyout growth:
where
Growth = growth rate of tangible fixed assets from one year prior to buyout to one year post-buyout,
IndustryGrowth = the median growth rate of tangible fixed assets of industry-peer private firms,
Turnover = one if management is replaced at or around leveraged buyout date, zero otherwise,
Managers’ age = the difference between the ages of departing and incoming managers,
PE = one if the leveraged buyout is sponsored by a private equity fund, zero otherwise,
Concentration = the change in Herfindahl index of ownership concentration,
Controls = I include targets’ firm size and cash flow at one year prior to buyout.
Median regression, which is a form of quintile regression, estimates the change in the medians of the
dependent variables produced by one unit of change in the predictor variables; therefore the estimates are
less affected by extreme outliers (Koenker and Hallock, 2001). This specification is also consistent with
previous univariate statistical tests where median values are used.
Table 7 reports the median regression estimates of targets’ growth on predictor variables. Private
targets sponsored by private equity firms grow more after buyouts than targets without private equity
sponsors do. When a private equity firm is present, the target’s tangible fixed assets increase by 34%
more than otherwise. Total assets and sales also grow more when a private equity firm is present
19
(unreported in the table). However, a change in ownership concentration, the growth of industry-peer
private firms, firm size before the buyout, and management changes do not significantly affect targets’
growth. As discussed in Section I, this finding supports the hypothesis that private equity firms can bring
in more financial and managerial resources into target firms, alleviate investment constraints, and grow
the targets.
5. The role of private equity firms
In Section IV.4., I document that the presence of private equity sponsors is particularly related to the post-
buyout firm investment and growth. Although critics of private equity argue that private equity firms take
advantage of cheap debt financing and transfer wealth from other parties to buyout investors, the evidence
thus far does not seem to support this view, at least for a sample of privately held targets. When private
equity firms sponsor the leveraged buyouts of privately held targets, there is more growth in employment
and investment, implying that private equity firms bring more resources into target firms and facilitate the
firms’ expansion.
In this section, I initially examine the pre- and post-buyout firm characteristics of targets of
sponsored and non-sponsored buyouts. Also I further investigate whether private equity sponsors select
firms which would have otherwise still grown or whether the private equity sponsors facilitate the targets’
growth.
5.1. Pre-buyout firm characteristics: Private equity sponsored targets vs. non-sponsored targets
I first compare the financial characteristics of private targets with private equity sponsors and those
without them to see if private equity firms acquire particular types of targets. Table 8 presents descriptive
statistics for the financial characteristics of sponsored and non-sponsored targets. The first row reports the
firm level characteristics while the second row reports the industry-adjusted characteristic. Sponsored
targets are slightly bigger: their total assets are £5.2 million, compared to non-sponsored targets’ assets of
£3.5 million. This may imply that investors, usually existing management teams, partner with private
20
equity firms when the transaction size is large. In particular, targets with private equity sponsors are much
more profitable and grow faster. The EBITDA to sales ratio of targets with sponsors is 0.11, 0.05 without
sponsors. The sales growth of targets with and without sponsors is 0.17 and 0.02, respectively. The
differences in profitability and growth are statistically significant at the 1% significance level. To the
extent that current sales growth is associated with future growth potential, the evidence suggests that
private targets with large growth opportunities are more likely to partner with private equity sponsors to
transfer ownership. The total debt to sales ratio is not statistically different between sponsored targets and
non-sponsored targets, but targets of both groups are significantly under-leveraged than their respective
industry peer private firms. Overall, it seems that sponsored targets are better-performing firms than non-
sponsored targets. Consistent with this finding, I find that the median deal value multiple on EBITDA of
sponsored targets is 8.89, while that of non-sponsored targets is 5.73 (unreported in the table).
Next, I estimate the following logistic regression for private targets to predict the likelihood of
sponsorship by private equity firms:
The dependent variable is a binary variable equal to 1 for sponsored target firms, 0 for control sample
firms. I use sales growth and capital expenditures to proxy for profitable investment opportunities. I
normalize capital expenditures (CAPEX), EBITDA, and total debt by sales. I use two sets of control
sample firms in the estimation. One is a set of non-sponsored targets of leveraged buyout, and the second
is other non-target private firms with the same two-digit SIC code and whose sales most closely matched
the sample firm's sales at the end of the fiscal year preceding the year of the leveraged buyout. The
multivariate results are reported in Table 9. Compared with non-sponsored targets, sponsored targets are
larger, profitable, and they spend more on capital expenditures. Relative to other industry-sized matched
non-target private firms, sponsored targets are more profitable, have more capital expenditures, and are
less leveraged. These results are largely consistent with univariate statistics. Better-performing firms
which have under-used debt capacity vis-à-vis their industry counterparts and a large investment outlay
21
are more likely to be targets of private-equity-led leveraged buyouts. In other words, private equity firms
sponsor leveraged buyouts of private targets with strong performance and large growth potential. After
the buyouts, private equity firms provide resources and take advantage of growth opportunities. For
example, in an unreported table, I find that total debt continues to rise in sponsored targets even after
leveraged buyouts: total debt increases by 120%, 137%, and 143% respectively for years +1, +2, and +3
compared with year -1. Therefore, it seems that private equity firms finance targets’ growth through
additional borrowing. In contrast, total debt of non-sponsored targets shows a downward trend after the
buyouts: total debt increases by 74%, 69%, and 36% respectively for years +1, +2, and +3 compared with
year -1. Therefore, non-sponsored targets incur debt to complete the transactions, but they reduce
leverage post-buyout, implying that they do not need further financing for expansion.
5.2. Ownership, management, and exit information: Private equity sponsored targets vs. non-
sponsored targets
Does the role that private equity firms play differ from that of other leveraged buyouts acquirers? To
address this question, I examine post-buyout ownership and management changes and information on
exits from leveraged buyout ownership. Panel A of Table 10 presents how ownership structures change
after leveraged buyout transactions. The median number of shareholders increases by two among private
targets without sponsors and by five among sponsored private targets, and the first and third quartile
number of shareholders show similar patterns. The difference in the median changes in the number of
shareholders between sponsored targets and non-sponsored targets are statistically significant at the 1%
level. It seems when private equity firms sponsor leveraged buyouts, the ownership structure becomes
moderately more diffused among a larger number of investors.
I compare the ages of owner-managers in targets with and without private equity sponsors to infer
the motives for leveraged buyouts. Owner-managers of private targets sponsored by private equity are six
years younger than those without sponsorship: 55 versus 61 years. This pattern may imply that when
firms need to transfer ownership for strategic reasons, they partner with private equity firms to complete a
22
leveraged buyout, while the majority of non-sponsored buyouts are likely driven by retirements.
However, it is difficult to know precisely what motivates owner-managers to sell the company.
Finally, I record the intensity of management changes surrounding the buyout year. The intensity
of management changes is measured as the number of managers replaced post-buyout divided by the total
number of managers prior to the buyout. The last row of Table 10 presents the mean and median values of
this measure. The median management change of private targets with private equity sponsors is 66%; that
of private targets without sponsorship is 50%. The difference in the median changes is statistically
significant at the 5% level. Hence, when private equity firms sponsor a leveraged buyout, management is
more frequently replaced.
Panel B provides information on the types of exits from leveraged buyout ownership. The most
popular exit route (15.8%) is through a trade sale, selling a portfolio company to another operating
company. Secondary buyouts, selling a portfolio company to another private equity firm, are the next
most common exit route, accounting for 10% of the sample. Only a small fraction of portfolio companies
were able to go public (0.59%). About 5.8% of private targets ended up in bankruptcy or liquidation. The
majority of target companies are still in leveraged buyout ownership. For deals completed before 2004, 40%
of the targets sponsored by private equity firms are still under leveraged buyout ownership, as opposed to
63.6% of targets without private equity sponsors. Therefore, it appears that participants of private firms in
leveraged buyouts are unlikely to partner with private equity firms when they simply seek to transfer
ownership.
5.3. Private equity firms’ selection or treatment
In the preceding two sections, the evidence suggests that both a private equity firm’s selection of and
treatment effect on target firms are at work. In other words, it appears that private equity firms select
targets with high profitability and growth potential, and, post-buyout, they substantially alter ownership
and management structure and facilitate growth.
23
To further examine whether a target’s growth is more the result of a selection effect or a
treatment effect, I employ propensity score matching. Ideally, I want to observe how a private target that
has been acquired by a private equity firm would make investments post-buyout if the firm opts not to
engage in a private-equity-led buyout. However, since the firm chose a leveraged buyout with a private
equity firm, I can not explicitly observe what the post-buyout investment would have been like in the
absence of a private equity firm. Therefore, using propensity score matching, I select a set of firms which
are likely to be targets of private equity firms. Then I compare the investment and growth of target firms
of private equity firms with those of a control sample of non-target firms with similar characteristics.
Specifically, I select non-target private firms with the same two-digit SIC code which closely resemble
target private firms in terms of firm size, growth, and profitability. If private equity firms do facilitate
targets’ growth, the post-buyout growth of sponsored-targets will be different from that of the control
sample of the likely sponsored target firms.
The results are reported in Table 11. By all measures of growth and investments, private-equity-
led targets experience substantial growth even after adjusting for similar non-target private firms in the
same industry. One exception is the capital expenditures to sales ratio. Although the ratio increases after
buyouts, the industry-adjusted capital expenditures to sales ratio is not statistically significantly different
from zero. The results suggest that private equity firms do increase targets’ growth.
6. Operating performance after buyouts
In this section, I examine the post-buyout operating performance to see whether the different investment
behaviors of private and public targets have different implications for operating performance in the post-
buyout period. My sample of buyout firms does not suffer from sample selection bias as the performance
of targets can be observed irrespective of whether they exit leveraged buyout ownership.
The main variable of interest is EBITDA. I exclude the year when the leveraged buyout occurred
from the analysis for two reasons: first, buyout-related expenses can understate operating performance in
year 0. Second, the first annual account after the buyout provides information on the business from the
24
time of the buyout to the new fiscal year-end, which, typically due to fiscal year-end changes, is shorter
than twelve months. This makes a pre- and post-buyout comparison difficult.
Table 12 reports the results. Among public targets, the level of EBITDA decreases after the
buyout while it increases among private targets. From year -1 to year 1, industry-adjusted EBITDA
decreases by 54% for public and increases by 10% for private targets. This is likely because public targets
reduce and private targets increase operating assets after buyouts.
I also examine the EBITDA to operating assets (the average of fiscal year-beginning and -end
current and tangible fixed assets), EBITDA to sales, and EBITDA to the number of employees. The
reason I normalize EBITDA by sales or the number of employees is to mitigate the bias due to write-ups
in operating assets. As firm size significantly increases post-buyout, these measures of operating
efficiencies drop for private targets. Most of the changes of operating efficiency measures are negative
and, after controlling for changes in industry counterparts, are not statistically significantly different from
zero. For public targets, operating efficiency by and large improves after the buyout. However, when
adjusted for industry-peer public firms’ performance, the operating efficiency improvement is not
statistically significant.
Table 13 presents the changes in operating performance by two groups of private targets: one
with private equity sponsors and the other without sponsors. There is a stark difference between the two
groups. Operating performance and efficiency are increasing fast prior to buyouts for sponsored private
targets. However, though EBITDA continues to increase, operating efficiency among those same targets
decreases. On the contrary, targets without private equity partnership exhibit the opposite characteristics.
The changes in operating performance and efficiency prior to buyouts are smaller than they are for peer
private firms. Yet, after the buyout, the targets improve operating efficiency substantially: By the end of
second year post-buyout, the EBITDA to sales ratio increases by 47%. This pattern implies that buyouts
of private firms without private equity sponsors lead to improved efficiency. In contrast, buyouts with
private equity sponsors inject capital into targets, leading to increased growth but not improved margins.
This deterioration of operating efficiency could be the result of poorer investments on the part of private
25
equity firms. However, it could also be that targets are making long-term investments or that profitability
decreases as the targets increase/optimize firm size and investments.
In Table 14, I examine the effects of buyouts led by private equity firms on efficiency measured
by gross margin and sales per employee, employees’ wages, and tax payments. I find that operating
efficiency does not improve among target firms sponsored by private equity funds. I also find that, after
adjusting for industry effect, wages per employee decrease after buyouts when a private equity firm is
present: the median value of industry-adjusted wage per employee drops by 13% from year -1 to year +3.
Tax payments substantially decrease for private-equity-led buyouts. The industry-adjusted tax to sales
ratio drops by 94% from year -1 to year +3. Therefore, although private equity firms increase
employment after buyouts, compared to wage increases in industry counterparts, they reduce employee
wages. Private equity firms’ cost saving also derives from a substantial reduction in tax payments.
7. Conclusion
I study the effects of leveraged buyouts on private companies. Though the buyouts of private companies
account for the majority of deals in the leveraged buyout market, most academic studies base their
analysis on a sample of public-to-private buyout transactions. In this respect, our understanding of
leveraged buyouts—of why they occur and how firms restructure and perform afterwards— is still limited.
This paper, by investigating private firm buyout transactions, expands our understanding of leveraged
buyout transactions and their effect on target firms.
There is a striking difference between private targets and public targets with regard to post-
buyout investment policy. Consistent with previous studies based on the sample of public-to-private
leveraged buyout (Kaplan, 1988, Smith, 1989), public firms reduce firm size and investment after buyouts.
The evidence is consistent with the view that public firms reduce agency costs after leveraged buyouts by
reversing previously made inefficient investments. In contrast, private targets significantly increase post-
buyout firm size and investment.
26
Owner-managers and incoming managers can complete the transaction either independently or
with private equity sponsors. Private companies with larger profitability and growth opportunities tend to
become targets of private equity. Post-buyout, rather than improving operational efficiency, these targets
grow in firm size and make greater investments. On the other hand, target companies which complete the
ownership transfer through leveraged buyouts without private equity sponsors experience less change in
investment policy.
It may seem that private-equity-led leveraged buyouts of small private firms are similar to venture
capital investments. However, I show that, unlike venture capital investments, targets of leveraged
buyouts are older than their industry-peer private firms and targets assume substantial post-buyout debt.
The evidence suggests that private equity firms attempt to reorganize target firms in a way which
reduces inherent the targets’ inefficiencies—agency problems in public targets and investment constraints
in private ones. To my knowledge, this is the first study to show the importance of private equity sponsors
and leveraged buyouts in alleviating the investment constraints of private firms.
27
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Table 1: Distribution of leveraged buyouts
This table presents the distribution of leveraged buyout transactions by transaction completion year and by target
status—private or public firms. % Sponsor is the proportion of deals which were sponsored by private equity funds.
Total deal value is the sum of all deal values. Median deal value is the median deal value. % Available deal value is
the proportion of deals where deal values are available in a given target status. Deal values are the total
consideration paid for the actual stake acquired and are in £ millions.
LBO Year Private Public Total
1998 7 0 7
1999 3 10 13
2000 8 11 19
2001 19 15 34
2002 13 3 16
2003 19 23 42
2004 29 13 42
2005 14 8 22
2006 41 13 54
2007 17 0 17
Total 170 96 266
63.91% 36.09%
% Sponsor 66.47% 61.46% 64.66%
Median deal value (£ million) 11.98 55.77 21.05
Total deal value (£ million) 2663.64 40271.38 42935.02
% Available deal value 54.12% 100.00% 70.68%
30
Table 2: Ownership characteristics of privately held targets
The table reports the ownership structure of private targets for the subsample of 141 private firms. Ownership
information (the number of shareholders, the ownership of the largest owners, and owner age) is collected from
Form 363a (annual return). All companies in the U.K. must submit this annual return form to Companies House
each year: It provides a snapshot of general information about the company, including the details of key personnel,
the registered office, share capital and shareholdings.
Variable 1st Quartile Mean Median 3rd Quartile

Before buyouts 1 3.51 2 3
# of Shareholders
After buyouts 4 7.33 6 8
Ownership of Before buyouts 75.92% 86.20% 100.00% 100.00%

previous owner After buyouts 0.00% 7.47% 0.00% 5.07%
Departing 51 56.92 56 63
Owner-managers’ age
Incoming 41 46.17 45 50
31
Table 3: Financial characteristics of target firms prior to leveraged buyouts
This table reports summary statistics of financial characteristics for public and private target firms prior to buyout.
Financial information is at the end of the fiscal year preceding the year of the leveraged buyout. The Wilcoxon
signed rank sum test is performed for the difference between targets and industry-peer firms. The significance level
is reported with asterisks next to industry-adjusted median values. The Wilcoxon-Mann-Whitney Z-stat is also
presented for the difference between private and public targets. *, **, and *** denote statistical significance at the
10%, 5%, and 1% levels, respectively.
Variable Private Public Median test
***
Book value of total assets (£ million) 4.244 85.741 11.806
***
Industry-adjusted median -6.511 -3.550 0.237
***
Sales (£ million) 9.575 83.791 8.947
**
Industry-adjusted median -4.811 -13.962 -1.263
***
PPE (£ million) 0.640 26.159 11.051
***
***
Employees 94 732 8.160
**
Industry-adjusted median -48 -11 -0.031
***
Employee costs (£ million) 2.627 18.377 9.020
**
***
Firm age 15.000 28.000 4.693
***
Industry-adjusted median 1.500 0.500 -0.432
*
Operating income / Sales 0.090 0.060 -1.858
*** ***
EBITDA / Sales 0.110 0.110 -0.416
*** *** *
Cash / Sales 0.130 0.140 0.830
*** ***
***
Sales growth 0.130 0.020 -3.635
*** * ***
Industry-adjusted median 0.060 -0.040 -3.875
***
Current debt / Sales 0.230 0.270 2.586
*** *
**
Non current debt / Sales 0.010 0.040 2.176
***
***
Total debt / Sales 0.260 0.340 3.972
***
***
Interest expense / Sales 0.000 0.010 5.906
*** ***
Industry-adjusted median 0.000 0.000 3.340
Capital expenditure / Sales 0.010 0.030 1.178
32
Table 4: Logistic regression to predict the likelihood of being a leveraged buyout target
This table reports the estimate of a logistic regression to predict the likelihood of being a target, based on firm
characteristics. The dependent variable is a binary variable equal to 1 for target firms and 0 for industry-peer firms. I
match the sample firms with control firms that have the same two-digit SIC code whose sales most closely matched
the sample firm's sales at the end of the fiscal year proceeding the year of the leveraged buyout. *, **, and ***
denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Private Firms Public Firms

(1) (2)
log(Total assets) 0.007 0.611***
(0.063) (3.856)
Sales growth 1.172* -0.322
(1.653) (-0.790)
Capital expenditures / Sales 2.146*** -3.194*
(3.778) (-1.654)
EBITDA / Sales 14.478*** 8.355***
(7.268) (5.508)
Cash / Sales 0.509 2.641**
(0.823) (2.018)
Total debt / Sales -1.533* 15.409***
(-1.727) (8.092)
Intercept -3.271* -14.824***
(-1.844) (-4.948)
Obs. of target firms 170 96
Obs. of non-target firms 1,149 453
Adjusted R2 0.29 0.69
33
Table 5: Changes in firm size and investment after leveraged buyouts
The median (industry-adjusted) percentage changes of total assets, sales, property, plant, and equipment (PPE), the number of employees, and capital
expenditures are presented from year -2 to year +3 relative to the year of the leveraged buyout completion. *, **, and *** indicate that the median change is
significantly different from zero at the 10%, 5%, and 1% levels, respectively, as measured by the two-tailed Wilcoxon signed rank sum statistics.
Private Public
Variable -2 to -1 -1 to 1 -1 to 2 -1 to 3 -2 to -1 -1 to 1 -1 to 2 -1 to 3
Total assets (£ million) Year -1: 4.24 85.74
*** *** *** *** *
Percentage change (%) 0.12 0.57 0.75 0.80 0.02 0.05 -0.01 0.08
*** *** *** *** ***
Industry-adjusted change (%) 0.12 0.59 0.83 0.81 -0.06 -0.11 -0.15 -0.31
Sales (£ million) Year -1: 9.57 83.79
*** *** *** *** *
Percentage change (%) 0.13 0.28 0.37 0.35 0.02 0.02 0.01 -0.06
*** *** *** *** *** *** ***
PPE (£ million) Year -1: 0.64 26.16
*** *** ** *** *** ***
Percentage change (%) 0.00 0.07 0.19 0.19 -0.01 -0.16 -0.18 -0.25
*** *** *** *** *** ***
Industry-adjusted change (%) 0.04 0.18 0.23 0.30 0.00 -0.21 -0.26 -0.35
Employees Year -1: 94 732
*** *** *** *** *** *** *** ***
** *** *** *** ** *** *** ***
Capital expenditures / Sales Year -1: 0.01 0.03
*** *** ** * * *
** * * *
Capital expenditures (£ million) Year -1: 0.11 1.41
** *** *** *** * ** * *
* *** *** *** ** ** *
34
Table 6: Acquisitions and disposals of businesses and operations after leveraged buyouts
This table presents the total cash outflows and inflows associated with acquisitions and disposals of operations and
divisions during leveraged buyout ownership. Specifically, I compute the sum of all cash outflows (inflows)
associated with acquisitions (disposals) from the time of a leveraged buyout to the exit (when the firm exited
leveraged buyout ownership) or otherwise to the present, and I divide this sum by tangible fixed assets at the end of
fiscal year-end prior to buyout. I exclude cash outflows associated with the leveraged buyouts. I also report the cash
flows of control sample firms. I match the sample firms with control firms with the same two-digit SIC code whose
sales most closely matched the sample firm's sales at the end of the fiscal year preceding the year of the going-
private transaction. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively, for the
Wilcoxon signed rank sum test.
Lower Upper
Quartile Median Quartile
Private Acquisitions 0.309 0.660 2.170
Control sample 0.000 0.000 0.234
Disposals 0.000 0.000 0.000
Public Acquisitions 0.000 0.043 0.302
Disposals 0.000 0.017 0.446
Median (Z-stat) Acquisitions Disposals
Difference
*** ***
(public - private) 3.543 -2.666
35
Table 7: Determinants of post-buyout growth
This table presents the estimates of median regression of firm growth rates on firm characteristics. The regression
estimates the change in the median of firm growth rates produced by one unit of change in the predictor variable.
The dependent variable is the change in tangible fixed assets from year -1 to year +1. Median industry growth is the
median growth rate of tangible fixed assets of industry-peer private firms. Management turnover is one if
management is replaced at around leveraged buyout date, zero otherwise. Managers’ age is the difference between
the ages of departing and incoming managers. Private equity sponsor is one if the leveraged buyout is sponsored by
a private equity fund, zero otherwise. Concentration is the change in Herfindahl index of ownership concentration.
*, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
(1) (2) (3) (4) (5) (6)

Median industry growth -0.034 -0.109
(-0.266) (-0.820)
Management turnover 0.045 0.128
(0.247) (0.540)
Managers' age -0.001 0.001
(-0.185) (0.086)
Private equity sponsor 0.342*** 0.355*
(2.717) (1.688)
Concentration -0.008 -0.019
(-0.690) (-1.097)
Firm size in year -1 -0.007 -0.069* -0.085** -0.079** -0.045 -0.095
(-0.173) (-1.675) (-2.108) (-2.080) (-0.879) (-0.780)
Cash flow / Sales 1.023** 1.073** 0.375 0.194 1.394** 1.988
(2.277) (2.157) (0.846) (0.437) (2.330) (1.270)
Constant 0.048 0.948 1.308** 0.988* 0.618 1.324
(0.081) (1.642) (2.259) (1.845) (0.862) (0.741)
Number of observations 170 141 141 170 141 141
Pseudo R2 0.023 0.032 0.036 0.068 0.045 0.067
36
Table 8: Financial characteristics prior to leveraged buyouts: Private equity sponsored targets vs.
non-sponsored targets
This table reports summary statistics of financial characteristics for targets of private–equity-sponsored deals and
those without sponsors prior to buyout. Financial information is at the end of the fiscal year preceding the year of the
leveraged buyout. The Wilcoxon signed rank sum test is performed for the difference between targets and industry-
peer firms. The significance level is reported with asterisks next to industry-adjusted median values. The Wilcoxon-
Mann-Whitney Z-stat is also presented for the difference between private targets and public targets. *, **, and ***
denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Variable Non PE sponsor PE sponsor Median test
**
Book value of total assets (£ million) 3.558 5.213 -2.157
*** *** **
Sales (£ million) 9.413 10.419 -0.357
**
PPE (£ million) 0.701 0.623 -0.492
*** ***
Employees 92 94 -0.976
***
Industry-adjusted median -53 -45 -0.297
Employee costs (£ million) 2.545 2.731 -1.083
***
*
Firm age 17.000 14.500 1.956
** **
Industry-adjusted median 0.500 2.000 0.970
***
Operating income / Sales 0.030 0.110 -4.197
*** ***
***
EBITDA / Sales 0.050 0.120 -3.956
* *** ***
*
Cash / Sales 0.090 0.140 -1.802
*** ***
***
Sales growth 0.020 0.170 -3.415
*** ***
Industry-adjusted median -0.020 0.130 0.000
Current debt / Sales 0.230 0.220 -0.294
** **
Non-current debt / Sales 0.000 0.010 -0.192
*** ***
Total debt / Sales 0.250 0.270 -0.768
*** ***
Interest expense / Sales 0.000 0.000 0.134
** ***
Industry-adjusted median 0.000 -0.010 0.549
Capital expenditure / Sales 0.010 0.010 0.213
37
Table 9: Logistic regression to predict the likelihood of being a private-equity-sponsored buyout
target
This table reports the estimate of the logistic regression to predict the likelihood of being a sponsored target. The
dependent variable is a binary variable equal to 1 for target firms, 0 otherwise. In model (1), the control firms are
private targets which underwent leveraged buyouts without private equity sponsors. In model (2), I match the
sample firms with control firms with the same two-digit SIC code whose sales most closely matched the sample
firm's sales at the end of the fiscal year preceding the year of the going private transaction, but which did not
undergo leveraged buyouts. For each independent variable, I select the median value of industry-peer firms. *, **,
and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Variable (1) (2)
log(Total assets) 0.441* 0.162

(1.742) (1.229)
Sales growth 1.424* 0.072
(1.693) (0.302)
Capital expenditures / Sales 3.776** 2.637***
(1.967) (3.847)
EBITDA / Sales 9.980*** 16.320***
(2.653) (7.531)
Cash / Sales 0.507 0.074
(0.404) (0.143)
Total debt / Sales -0.728 -0.695*
(-0.734) (-1.723)
Intercept -7.189* -6.271***
(-1.815) (-2.942)
Obs of PE sponsored targets 113 113
Obs of non-PE sponsored targets 57 1,206
Adjusted R2 0.157 0.220
38
Table 10: Post-buyout ownership structure and exit information: Private equity sponsored targets vs. non-sponsored targets
Panel A reports the ownership information of the subsample of 93 sponsored and 48 non-sponsored private targets. Ownership information (the number of
shareholders, the ownership of the largest owners, and owner age) is collected from Form 363a (annual return). I measure management change as the number of
managers replaced post-buyout divided by the total number of managers prior to the buyout. Panel B records the type of exit from leveraged buyout ownership
for 170 target firms. Trade sales indicates sales of a portfolio company to other operating companies. SBO is a “secondary buyout” where a portfolio company is
sold to other private equity firms.
Panel A: Changes in ownership and owners’ age

Sponsored targets Non-sponsored targets
Variable Before After Before After
Mean 3.61 8.85 3.31 4.47
# of shareholders
Median 2 7 2 4
Ownership of Mean 86.80% 7.20% 83.24% 9.02%

the largest owner(s) Median 100.00% 0.00% 98.44% 0.00%
Mean 55.68 45.63 62.71 48.52

Owner's age
Median 55 45 61 48
Mean 63.02% 57.04%

Management change
Median 66.67% 50.00%
Panel B: Exit from leveraged buyout ownership

B1: All leveraged buyouts
Trade sales SBO IPO Bankruptcy Unknown No Exit Total
All targets 15.88% 10.00% 0.59% 5.88% 3.53% 64.12% 170
Sponsored targets 16.81% 13.27% 0.88% 6.19% 5.31% 57.52% 113
Non-Sponsored targets 14.04% 3.51% 0.00% 5.26% 0.00% 77.19% 57
B2: Leveraged buyouts prior to 2004

Sponsored targets 21.54% 18.46% 1.54% 9.23% 9.23% 40.00% 65
Non-Sponsored targets 21.21% 6.06% 0.00% 9.09% 0.00% 63.64% 33
39
Table 11: Post-buyout growth: Private equity sponsored targets vs. non-targets
The median percentage changes of total assets, sales, property, plant, and equipment (PPE), the number of employees, and capital expenditures are presented
from year -2 to year +3 relative to the year of leveraged buyout completion. The control sample of non-target private firms is constructed using the propensity
score matching method based on sales growth, cash flow, and sales of target firms at the end of the fiscal year prior to the buyout. *, **, and *** indicate that the
median change is significantly different from zero at the 10%, 5%, and 1% levels, respectively, as measured by the two-tailed Wilcoxon signed rank sum
statistics.
Year relative to buyout -2 to -1 -1 to 1 -1 to 2 -1 to 3

Total assets (£ million) Year-1: 5.21
Control sample 10.93
*** *** *** ***
Percentage change (%) 0.16 0.81 0.91 0.94
*** *** *** ***
Industry-adjusted change (%) 0.15 0.78 0.94 1.15
Sales (£ million) Year-1: 10.42
Control sample 11.54
*** *** *** ***
*** *** ***
PPE (£ million) Year-1: 0.62
Control sample 2.65
*** *** ***
*** *** ***
Employees Year-1: 94
Control sample 166
*** *** *** ***
*** *** *** ***
Capital expenditure / Sales Year-1: 0.01
Control sample 0.01
*** **
Percentage change (%) -0.11 0.40 0.18 0.38
**
Industry-adjusted change (%) -0.06 0.31 -0.12 -0.12
Capital expenditure Year-1: 1.40
Control sample 3.24
* *** *** ***
* *** ** **
40
Table 12: Operating performance after a buyout
This table presents the median changes in operating performance surrounding the year of the leveraged buyout. Operating performance is measured in several
ways: 1) Percentage changes in EBITDA, 2) Percentage changes in the EBITDA to operating assets (the average of current assets and tangible fixed assets) ratio,
3) Percentage changes in the EBITDA to sales ratio, and 4) Percentage changes in the EBITDA to the number of employees ratio. Industry adjustment is made by
the median value of the changes in each variable among companies in the same two-digit SIC code. That is, (Industry-adjusted change in X)=(Change in X from
year -1 to year t)-(Median value of the change in X from year -1 to year t in industry peer companies), where X is the variable of interest and t is -2, 1, 2, or 3
relative to year -1 (one year before buyouts). *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively, for the Wilcoxon signed
rank sum test.
Private Public
Year relative to buyout -2 to -1 -1 to 1 -1 to 2 -1 to 3 -2 to -1 -1 to 1 -1 to 2 -1 to 3
EBITDA (£ million) Year -1: 0.93 8.87
*** *** *** **
Percentage change (%) 0.16 0.15 0.36 0.17 0.04 -0.07 -0.05 -0.21
*** * * *** * ***
Industry-adjusted change (%) 0.10 0.10 0.13 0.06 0.01 -0.54 -0.49 -0.47
EBITDA / Operating assets Year -1: 0.22 0.10
*
Percentage change (%) 0.02 -0.07 0.06 -0.20 -0.04 -0.07 0.09 -0.02
Industry-adjusted change (%) 0.02 -0.17 -0.09 -0.30 -0.04 -0.13 0.00 -0.15
EBITDA / Sales Year -1: 0.11 0.11
Percentage change (%) 0.01 -0.11 -0.08 -0.16 -0.06 -0.01 0.04 -0.11
Industry-adjusted change (%) 0.01 -0.16 -0.14 -0.33 0.03 -0.20 -0.16 -0.36
EBITDA / Employees ('000) Year -1: 8.76 7.47
*** ** *
Percentage change (%) -0.03 -0.07 -0.08 -0.17 0.13 -0.01 0.21 0.10
***
Industry-adjusted change (%) 0.04 -0.07 -0.26 -0.34 0.20 -0.19 -0.11 -0.06
41
Table 13: Operating performance after a buyout: Private equity sponsored targets vs. non-sponsored targets
This table presents the median changes in operating performance surrounding the year of leveraged buyouts for private targets with and without PE sponsors.
Operating performance is measured in several ways. 1) Percentage changes in EBITDA, 2) Percentage changes in the EBITDA to operating assets (the average
of current assets and tangible fixed assets) ratio, 3) Percentage changes in the EBITDA to sales ratio, and 4) Percentage changes in the EBITDA to the number of
employees ratio. Industry adjustment is made by the median value of the changes in each variable among companies in the same two-digit SIC code. That is
(Industry-adjusted change in X)=(Change in X from year -1 to year Y)-(Median value of the change in X from year -1 to year Y in industry peer companies),
where X is the variable of interest and Y is -2, 1, 2, or 3 relative to year -1 (one year before buyouts). *, **, and *** denote statistical significance at the 10%, 5%,
and 1% levels, respectively, for the Wilcoxon signed rank sum test.
Non PE Sponsors PE Sponsors

EBITDA (£ million) Year -1: 0.45 1.31
*** ** *** ** *** **
Percentage change (%) -0.04 0.42 0.45 0.13 0.27 0.07 0.29 0.27
** ** ***
Industry-adjusted change (%) -0.07 0.42 0.65 0.30 0.22 0.03 0.05 0.14
EBITDA / Operating assets Year -1: 0.13 0.27
** ** **
Percentage change (%) -0.05 0.16 0.38 0.07 0.03 -0.19 -0.16 -0.28
** * **
Industry-adjusted change (%) -0.22 0.05 0.30 0.20 0.07 -0.21 -0.31 -0.36
EBITDA / Sales Year -1: 0.05 0.12
* ** **
* * **
EBITDA / Employees ('000) Year -1: 5.80 11.32
** ** ** *
* * ** ** ** *
42
Table 14: The effects of leveraged buyouts on operating efficiency, wages, and taxes
This table presents the median changes in operating efficiency measures (gross margin, sales per employees, and working capital), wages, and tax payments
surrounding the year of leveraged buyouts for private targets with PE sponsors and those without PE sponsors. *, **, and *** denote statistical significance at the
10%, 5%, and 1% levels, respectively, for the Wilcoxon signed rank sum test.
Non PE Sponsors PE Sponsors

Gross profit / Sales Year-1: 0.27 0.41
Percentage change (%) -0.01 0.01 0.00 -0.02 0.01 **
0.00 -0.02 -0.08
Industry-adjusted change (%) -0.03 0.00 -0.04 0.11 0.00 -0.05 -0.16 * -0.15
Sales per employee ('000) Year-1: 95.29 105.96
Percentage change (%) -0.03 0.12 *** 0.19 *** 0.29 ***
0.08 ***
0.03 -0.01 0.00
Industry-adjusted change (%) -0.06 -0.01 0.09 0.21 0.06 *
-0.04 -0.03 -0.05
Working capital / Sales Year-1: 0.07 0.14
Percentage change (%) 0.06 -0.06 -0.20 -0.34 0.28 ***
-0.31 * -0.38 -0.16
Industry-adjusted change (%) 0.01 0.09 -0.12 -0.16 0.31 ***
-0.02 -0.13 -0.15
Wage per employee ('000) Year-1: 24.87 25.91
Percentage change (%) 0.02 0.09 *** 0.11 *** 0.02 0.08 ***
0.03 0.03 0.04
Industry-adjusted change (%) -0.04 0.01 0.02 0.01 0.03 **
-0.04 -0.07 ** -0.13 **
Tax / Sales Year-1: 0.01 0.03

Percentage change (%) -0.13 -0.05 -0.37 * -0.12 0.09 ***
-0.35 *** -0.53 *** -0.77 ***
Industry-adjusted change (%) -0.21 -0.28 *

-0.07 -0.11 0.16 **
-0.59 *** -0.75 *** -0.94 ***
43
Figure 1: Typical corporate structure after a buyout
This figure depicts the change in corporate structure after a leveraged buyout. Typically one or more acquisition vehicles (TopCo and NewCo in this figure) are
created for the purpose of the transaction. After NewCo is incorporated by management and/or private equity firms, it acquires Target and its subsidiaries.
Subsequently, TopCo is established and acquires NewCo. Usually TopCo issues equity capital (private equity) and NewCo finances the transaction with debt.
(Source: Speechley, Acquisition Finance, 2008)
44
Appendix I: Distribution of leveraged buyout transactions in the U.K.
Panel A reports the number of leveraged buyout transactions and deal values by transaction year and by target status. Private indicates independent private
targets, Public designates public targets, Divisional refers to buyouts of divisions of corporations, SBO specifies secondary buyouts where a portfolio company
owned by a private equity firm is sold to another private equity firm, and Distressed is the buyouts of firms in bankruptcy (in receivership). % Sponsor is the
proportion of deals which are sponsored by private equity funds. Total deal value is the sum of all deal values. Median deal value is the median deal value per
deal. Median deal multiple EBITDA is the median of deal value to EBITDA ratio. % Available deal value is the proportion of deals where deal values are
available in a given target status. Panel B reports the number of leveraged buyout transactions and deal values by transaction type and target status. Transaction
type is classified based on who is leading the transaction. MBO is management buy-out, IBO is institutional buy-out, MBI is management buy-in, and BIMBO is
buy-in management buy-out.
Panel A: Distribution of leveraged buyout transaction by target status
Target status
LBO year Total
Private Public Divisional SBO Distressed
1997 70 3 136 9 7 225
1998 62 20 144 11 6 243
1999 110 32 207 35 6 390
2000 85 29 196 32 7 349
2001 112 27 213 17 23 392
2002 123 7 172 17 36 355
2003 190 27 193 24 26 460
2004 233 14 148 47 24 466
2005 202 15 143 38 26 424
2006 237 22 122 61 14 456
2007 248 21 145 78 15 507
2008 208 12 105 41 19 385
Total 1,880 229 1,924 410 209 4,652
% 40.41% 4.92% 41.36% 8.81% 4.49%
% Sponsor 48.14% 74.24% 48.28% 100.00% 22.97%
Total deal value (£ million) 26,364.98 69,845.06 85,773.87 52,153.82 787.73 234,925.46
Median deal value (£ million) 10.00 74.64 10.00 62.63 4.50 15.00
Median deal multiple on EBITDA 7.87 7.92 7.76 10.61 6.11 8.51
% Available deal value 37.77% 100.00% 57.59% 82.93% 20.10% 52.21%
45
Appendix I - (Continued)
Panel B: Distribution of leveraged buyout transaction by transaction type and target status
Transaction type
Target status Total
MBO IBO MBI BIMBO
Private 1278 254 275 73 1880
67.98% 13.51% 14.63% 3.88%
Public 82 145 2 0 229
35.81% 63.32% 0.87% 0.00%
Divisional 1380 394 132 18 1924
71.73% 20.48% 6.86% 0.94%
SBO 186 208 12 4 410
45.37% 50.73% 2.93% 0.98%
Distressed 168 24 17 0 209
80.38% 11.48% 8.13% 0.00%
Total 3094 1025 438 95 4652
66.51% 22.03% 9.42% 2.04%
% Sponsor 38.43% 100.00% 46.80% 57.89% 53%
Total deal value (£ million) 40,324.60 190,624.24 3,357.91 618.72 234,925.46
Median deal value (£ million) 7.50 62.00 6.57 12.50 15.00
Median deal multiple on EBITDA 11.63 11.78 10.43 8.87 8.64
% Available deal value 46.61% 75.51% 40.64% 36.84% 52.21%
46
Appendix II: Examples of deal rationales
For a subsample of 113 leveraged buyout transactions, I collect deal rationale information though Zephyr
and Lexis-Nexis news search. Deal rationales are comments made by managers of targets, acquirers, or
equity sponsors on the completion of transactions; they contain information on the motive behind and
goals for leveraged buyouts. Below are examples of deal rationales.
1. Geographical expansion
Fontygary Parks Ltd, (11/21/2003), a caravan park operator: “We would look to expand into … other
places or new builds even in Spain or France.”
Quadrate Ltd, (3/12/2006), an ERP systems software developer: “The MBO will allow the company to
expand into the U.S.”
2. Expansion through new investments
CFM City Financial Mailing (8/16/1999), a mailing annual financial reports and shareholder circulars:
"We will be using our specialist knowledge of the direct mail market to expand the business of CFM and
to capitalise on the growth opportunities in the direct mail sector."
West Cornwall Pasty Co. Ltd. (10/11/2007): "Partnering with Gresham will provide us with a strong
platform from which to grow the business in the future. The new funding will enable us to implement our
roll-out plans and we are very excited by the opportunities that lie ahead of us."
3. Acquisitions
Maybin Support Services Ltd, (3/5/2006), a cleaning and security service firm: "It is our intention to build
upon this first-rate business platform throughout Ireland and, when appropriate, to expand our services
farther afield through both organic growth and through further acquisitions," said Mr. Terry Brannigan.
Metal & Waste Recycling Ltd, (2/14/2006), a metal recycling service: “The acquisition by Barclays will
allow the company to expand by making further acquisitions.”
47

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Leveraged Buyouts of Private Companies

JOB MARKET PAPER

December 10, 2009

ownership and control in private firms.

cash flow problems by reversing previously made inefficient investments or acquisitions.

opportunities for their descendants.

tolerant than the individual owners.

demand for corporate control activities will be more likely to go private.

constraints and capitalize on growth opportunities through a leveraged buyout.

possible to examine a large sample of buyouts.

number of shareholders increases by five (two).

growth and investments.

firms grow and expand post-buyout.

evidence in this paper cannot distinguish between these two hypotheses.

performance of target firms after buyouts, and Section 6 concludes.

1.1. Data sources and some institutional background

buyouts with private equity partners.

holding companies of Target and its subsidiaries. 8

1.2. Sample selection

process, I exclude 34 cases where accounting data is insufficient. 9

3. Pre-buyout characteristics of target firms

3.1. Pre-buyout ownership characteristics of privately held targets

3.2. Pre-buyout financial characteristics

3.2.1 Private targets vs. public targets

types of firms should be well positioned to take high leverage.

0.26 and 0.37, respectively.

are more profitable and grow faster than public targets.

3.2.2 Determinants of the likelihood of being a target

leverage may be important determinants of leveraged buyouts.

4. Post-buyout ownership structure, investment, and performance

4.1. Ownership structure

owners completely liquidate their ownership through leveraged buyouts.

4.2. Firm size, capital expenditure, and acquisitions and disposals

afterwards for private and public targets.

(PPE), sales and the number of employees.

the same period.

wage per employee decreases post-buyout as I show in Table 14.

estimated by the following measures:

buyout while public targets do not.

the investment constraints of privately held targets.

4.3. Analysis of Deal rationales

earlier quantitative analysis.

Opportunity Management Ltd.).

according to different future plans.

grow and expand the business post-buyout.

4.4. Median regression of firm growth on firm characteristics

several potential determinants of the post-buyout growth.

• Time-varying investment opportunities: It could be that new investment opportunities simply

with the greater post-buyout growth.

would be more risk-tolerant than individual owners.

• Ownership concentration: I examine whether the change in ownership concentration is associated

reduction in ownership concentration will be associated with post-buyout growth.

Concentration = the change in Herfindahl index of ownership concentration,

previous univariate statistical tests where median values are used.

5. The role of private equity firms

sponsorship by private equity firms:

moderately more diffused among a larger number of investors.

more frequently replaced.

5.3. Private equity firms’ selection or treatment

and management structure and facilitate growth.

sample of the likely sponsored target firms.

6. Operating performance after buyouts