Reverse‐LBOs, re‐LBOs and informational asymmetry hypothesis of LBO transactions

Abstract

PurposeThe purpose of this paper is to examine the informational asymmetry (informational advantage of managers) in leveraged buyout (LBO) transactions.Design/methodology/approachUnlike previous studies of informational asymmetry in LBOs, this research uses a set of reverse‐LBO and re‐LBO firms. The paper proposes and empirically tests three hypotheses that draw on the informational advantage of managers in LBOs. Specifically, the value gain (VG) realized by the reverse‐LBO firms is compared with that realized by a control sample of firms; the wealth distribution between managers and pre‐buyout shareholders is studied; and, finally, the performance of re‐LBO firms relative to reverse‐LBO firms is evaluated.FindingsThe results do not support the view that managers use buyouts to exploit their informational advantage. Specifically; the performance of LBO firms under the private ownership is comparable to those of matching public firms; the management team's return in a LBO deal is not significantly more than pre‐buyout shareholders’ return; and repeating reverse‐LBO firms (re‐LBOs) do not necessarily perform better than the non‐repeating reverse‐LBO firms.Originality/valueWhile reverse‐LBOs have been investigated to some extent in the prior literature, studies on re‐LBOs are quite scant – although these transactions offer a new and interesting avenue to examine the motivations behind LBOs in general. The use of the entire LBO − reverse‐LBO − re‐LBO cycle in testing the informational advantage of managers is a novelty. It is hoped that re‐LBOs will attract the amount of attention they deserve as these firms may offer interesting means to reinvestigate commonly debated theories of corporate finance.

Impacts of sustainable structural growth on the economic performance of listed companies

“…Jennings and Mazzeo (1986) examine such acquisitions as hostile takeovers, when the acquisition is executed in spite of disagreement of governing bodies (via direct proposal to shareholders or replacing managers of a company). Kosedag et al (2009) tackle the reverse takeover cases, when a company performs the acquisition of a public company and enters the public market through such transaction in order to avoid a lengthy process of going public through Initial Public Offerings (IPOs). It can also help mitigate risks related to the volatility (mood swings and cycles) in the public markets.…”

Private Equity and LBOs: An Efficient Investment Tool Needing Regulation

“…A study has shown that private equity funds had a significant role in leveraged buyouts of large US public companies between 1980 and 2006. The study shows that companies experienced a sharp decline in investment and growth when they are controlled by PE funds [7]. On the one hand, because of its inefficiency, the market does not favor long-term investments projects, and companies that undertake long-term projects are undervalued and then targeted for takeovers [8].…”

Market for Corporate Control and Contractual Buyout (CoBO): A New 'Collective Ownership-and-Administrative' Strategy

“…In the earlier versions, LBO was a practice by which the owner/founder seeking to cash-out his investment transferred the firm to manage or younger family members, who can put up a small amount of capital, and borrow the rest (Kosedag, Mehran, and Qian, 2009). …”