Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation

Renneboog, Luc; Simons, T.; Wright, Mike

doi:10.1016/j.jcorpfin.2007.04.005

Cited by 211 publications

(125 citation statements)

References 68 publications

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“…Second, our findings on the asset-pricing implications of local IPOs and delistings are new to the literature and join the recent contributions by Braun andLarrain (2009), Colaco et al (2009) and Hsu et al (2010) whereby IPOs are investigated as an integrated phenomenon that interacts with the surrounding economic environment rather than as a stand-alone corporate event. Our results for delistings introduce this same integrated perspective into the ongoing public-to-private transactions debate (e.g., Renneboog and Simons, 2005;Renneboog et al, 2007;Baran and King, 2010;Achleitner et al, 2013;Boubakri et al, 2013;Fidrmuc et al, 2013;Croci and Del Giudice, 2014). In fact, IPOs and delistings emerge as local substitutes: The delistings of local firms would free space and extant local resources, thus increasing the success of local IPOs and vice versa.…”

Section: Introductionsupporting

confidence: 58%

Local IPOs, local delistings, and the firm location premium

Baschieri

Carosi

Mengoli

2015

Journal of Banking & Finance

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a b s t r a c tBorrowing a measure from ecology, we introduce a spatial dispersion index to quantify the firm traits related to firm geographic location and investigate firm exposure to local home bias and local investor risk tolerance as determinants of corporate market value. Consistent with the investor preference for local stocks, we find listed firms benefit from a location premium that increases with firm isolation and local investor wealth. IPOs and delistings are found to affect the market value of neighboring listed firms: isolated firms decrease in value when they cluster due to local IPOs while clustered firms increase in value as they become more isolated due to local delistings. Local firm clustering and risk tolerance also affect IPO underpricing. Empirical findings depict a framework where IPOs and delistings are locally jointly determined.

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Section: Introductionsupporting

confidence: 58%

Local IPOs, local delistings, and the firm location premium

Baschieri

Carosi

Mengoli

2015

Journal of Banking & Finance

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“…It appears that premiums are generally somewhat lower in the 2000s compared to the 1980s. The exception is the study by Renneboog et al (2007) of 177 buyouts in the United Kingdom between 1997 and 2003. They document an average premium of 40% (median 38%), which is higher than the contemporaneous LBO premiums of 27-29% in the United States (Guo et al, 2011).…”

Section: Value Creation In Lbosmentioning

confidence: 99%

Corporate Restructuring

2017

Mergers, Acquisitions, and Corporate Restructurings

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We survey the empirical literature on corporate financial restructuring, including breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). For each transaction type, we survey techniques, deal financing, transaction volume, valuation effects and potential sources of restructuring gains. Many breakup transactions appear to be a response to excessive conglomeration and attempt to reverse a potentially costly diversification discount. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the 1990s on average create value similar to LBOs of the 1980s. Recent developments include consortiums of private equity funds (club deals), exits through secondary buyouts (sale to another LBO fund), and evidence of persistence in fund returns. LBO deal financing has evolved toward lower leverage ratios. In Europe, recent deals are financed with less leveraged loans and mezzanine debt and more high-yield debt than before. Future research challenges include integrating analyses across transaction types and financing mixes, and producing unbiased estimates of the expected return from buyout investments in the presence of limited data on portfolio companies that do not return to public status.

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“…There is also the possibility of underestimation, which emphasizes the existence of a positive relationship between the underestimation of pre-LBO firms and the gains expected by the shareholders at the time of completion of the transaction. Within the work carried out by Renneboog, Simons, Wright (2007), this effect is found to be stronger for the Management BuyOut (MBO) and Institutional BuyOut (IBO), rather than in Management BuyIn (MBI), as the former are able to make better use of the problems related to the underestimation and deriving from information asymmetries. The hypothesis of defense against takeover, however, suggests that LBOs transactions, especially if then followed by a delisting, are the last line of defense against hostile takeovers and initial public offerings (Lowenstein, 1985;Stulz, 1988), especially when the pressure on the part of the market for corporate control becomes stronger (Lehn and Poulsen, 1989;Halpern et al, 1999).…”

Section: The Economic Literature On Leverage Buy Outmentioning

confidence: 99%

“…With regard to the economic effects of buyout transactions, the economic literature shows that such interventions, generally determine a major improvements in shareholder wealth (De Angelo et al, 1984;Kaplan, 1989b;Lehn and Poulsen, 1989;Easterwood et al, 1994, Weir andLaing, 2003;Renneboog et al, 2005Renneboog et al, , 2007. Very often, however, these gains to shareholders, are related to the expropriation of minority investors (Amihud, 1989) and other stakeholders (Marais et al, 1989), such as the bondholders (Travlos andCornett, 1993, Citron et al , 2003) and employees (Shleifer and Summers, 1988;Wright et al, 2009).…”

Section: Hypothesis: Risks and Perils In Lbo Transactionsmentioning

confidence: 99%

Risks and Perils in LBO Transactions

Capizzi

Giovannini

Pesic³

2014

SSRN Journal

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In this study we analyze the risks and perils arising from LBO transactions, in order to consider the impact of private equity in this category of transactions. From this perspective, focusing attention on 2,450 deals occurred during the period 2002-2011, our study adds to previous literature that has investigated the post-LBO operating performance and the factors that can determine the success of those deals. In particular, by running a multivariate regression analysis in order to test for different research hypothesis proposed by literature dealing with the determinants of LBO deals, we confirm the validity of the assets stripping hypothesis, even if we find evidence that the presence of private equity, among other factors, can help to mitigate that peril. We find evidence that, especially in the short term, enterprises suffer from a slight deterioration in operating performance compared to their situation before the buyout. Moreover, under specific circumstances, enterprises experience a slight improvement in the ability to generate cash. Finally, we find positive evidence about the presence of private equity investors, which are mainly able to promote the growth of firms, as well as to increase the capability to generate cash, rather than generate positive effects on the level of employment. At the same time, we find also evidence that the presence of private equity investors is a significant determinant of distress for firms involved in LBO transactions. Risks and Perils in LBO transactions AbstractIn this study we analyze the risks and perils arising from LBO transactions, in order to consider the impact of private equity in this category of transactions. From this perspective, focusing attention on 2,450 deals occurred during the period 2002-2011, our study adds to previous literature that has investigated the post-LBO operating performance and the factors that can determine the success of those deals. In particular, by running a multivariate regression analysis in order to test for different research hypothesis proposed by literature dealing with the determinants of LBO deals, we confirm the validity of the assets stripping hypothesis, even if we find evidence that the presence of private equity, among other factors, can help to mitigate that peril. We find evidence that, especially in the short term, enterprises suffer from a slight deterioration in operating performance compared to their situation before the buyout. Moreover, under specific circumstances, enterprises experience a slight improvement in the ability to generate cash. Finally, we find positive evidence about the presence of private equity investors, which are mainly able to promote the growth of firms, as well as to increase the capability to generate cash, rather than generate positive effects on the level of employment. At the same time, we find also evidence that the presence of private equity investors is a significant determinant of distress for firms involved in LBO transactions. JEL Codes: G32, G34

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Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation

Cited by 211 publications

References 68 publications

Local IPOs, local delistings, and the firm location premium

Local IPOs, local delistings, and the firm location premium

Corporate Restructuring

Risks and Perils in LBO Transactions

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