The Causes and Consequences of Leveraged Management Buyouts

Fox, Isaac; Marcus, Alfred A.

doi:10.5465/amr.1992.4279571

Cited by 70 publications

(19 citation statements)

References 50 publications

(59 reference statements)

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“…Jensen (1989) argues that the LBO governance structure provides senior management with incentive devices that attenuate agency problems by aligning managers' interests with those of the owners. First, increased debt increases firms' fixed interest obligations, which provides managers with incentives to generate cash to service the debt and to reduce sub-optimal investments and redirect this cash towards servicing the debt (Fox and Marcus 1992). Thus, there is debt bonding.…”

Section: Theoretical Predictionsmentioning

confidence: 98%

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Leveraged buyouts, private equity and jobs

Amess

Wright

2010

Small Bus Econ

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Using a unique data set of 533 leveraged buyouts (LBOs) observed over the 1993-2004 period, covering all size ranges, the study conducts a systematic analysis to determine and quantify: (1) the effect of private equity (PE) and LBO governance on employment and (2) whether the size of the target firm impacts on post-buyout employment effects. After accounting for endogeneity, we find that LBOs, whether PE financed or not, do not have significantly different employment levels compared with a control sample of firms. Additionally, there are no employment effects contingent on the size of the target firm. The findings contrast with anecdotal claims of job destruction. The study therefore makes an important contribution to the debate on the impact of LBOs and PE.

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Section: Theoretical Predictionsmentioning

confidence: 98%

“…There is, however, concern about the source of such performance gains (Palepu 1990;Fox and Marcus 1992;Thompson and Wright 1995). One such concern is that LBO investors' wealth gains occur through decision-making that leads to job destruction (International Trade Union Confederation, ITUC 2007).…”

Section: Theoretical Predictionsmentioning

confidence: 98%

Leveraged buyouts, private equity and jobs

Amess

Wright

2010

Small Bus Econ

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“…Leverage and ownership were included as control variables in the analysis since this study attempts to reach beyond the discipline of debt and incentives of managerial equity participation as the leading explanations to the LBO phenomenon (Halpern et al, 1999;Fox and Marcus, 1992;Smith, 1990;Jensen, 1989). Following Jiraporn et al (2004) and Mian and Rosenfeld (1993), we calculated firm leverage (Debt) as (long-term debt/total assets) using balance sheet information in individual 10-K filings.…”

Section: Leveraged Buyoutsmentioning

confidence: 99%

“…Additionally, by increasing management's ownership in the firm, the LBO aligns the interests between shareholders and managers toward maximizing shareholder value. As such, the monitoring discipline of debt and the incentives of managerial ownership in the firm represent the two leading explanations for why LBOs occur and how they improve performance (Halpern et al, 1999;Fox and Marcus, 1992;Smith, 1990;Jensen, 1989).…”

Section: Introductionmentioning

confidence: 99%

Rethinking value creation in leveraged buyouts

Braun

Latham²

2009

Management Decision

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Purpose -This study aims to examine the governance structure of the firm undergoing a complete buyout cycle (reverse leveraged buyout). Its purpose is to empirically explore the evolution of corporate board structures as a unique source of value creation, in addition to the agency mechanisms of the discipline of debt and incentives of equity participation. Design/methodology/approach -The authors rely on agency theory and the resource dependence perspective to develop sets of hypotheses that examine changes in the board composition of 65 R-LBOs and 65 matched continuing firms spanning a 25-year period . Findings -The empirical results reveal numerous insights about why R-LBOs go private, to what extent boards restructure during the buyout phase, and how those changes relate to firm performance. Taken together, the findings give strong credence to the argument that boards represent a supplemental source of value creation in the buyout process.Research limitations/implications -For scholars, the study presents a platform for further inquiry into the role of boards of directors in R-LBOs as well as the inclusion of resource dependence theory to inform on the phenomenon. Practical implications -The study helps to address this new source of value creation for practical interest. It offers a benchmark for buyout firms to compare their board characteristics by establishing linkages between pre-buyout deficiencies, post-buyout modifications, and post-SIPO performance. Originality/value -The results shift scholarly attention away from the structural governance tools to the group dynamics of the board. The findings call into question the restricted attention given by buyout researchers to leverage and ownership as value drivers by prompting a closer evaluation of the relationship between buyout board structures and related structuring of debt and managerial equity participation. Furthermore, the inclusion of the resource-dependency perspective alongside agency theory as an explanatory theory allows for a richer account of the LBO phenomenon and its sources of value creation.

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“…A voluminous literature has now developed concerning the effects of management and leveraged buyouts, investigating the reductions in information asymmetry, reductions in internal agency costs, wealth transfers arising from the renegotiation of implicit contracts, and wealth transfers arising in former parent companies arising from the changed risk of the organisation (see Fox and Marcus, 1992;Jensen, 1993; Thompson and Wright, 1995, for reviews). A particularly important argument, and the focus of this paper, is that leveraged buyout firms achieve operating efficiencies due to the discipline and monitoring imposed by high leverage (Jensen, 1986;Wruck, 1990).…”

Section: Introductionmentioning

confidence: 99%

Loan Covenants and Relationship Banking in MBOs

Citron

Robbie

Wright

1997

Accounting and Business Research

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This paper examines the role of accounting-based covenants and other sources of information in signalling financial distress in UK MBOs. Using an in-depth questionnaire and follow-up interviews to investigate the perceptions of senior UK MBO lenders, we find that: MBO loan agreements contain more covenants than general corporate lending agreements; monthly management accounts and telephone communication are more frequent first indicators of distress than are accounting-based covenant breaches; lenders with specialist MBO lending units are more likely to waive covenant breaches and less likely to recall loans in default than those without such units; syndicate members find both information flows prior to breach and subsequent action taken to be less effective than do syndicate leaders or sole lenders; and the presence of a specialist MBO lending unit provides the skills and reputation needed to establish a high degree of trust between the banks on the one hand and the MBOs and the equity houses on the other, but there is wide variety in the ways that banks manage these relationships. These findings confirm the expectation that the relatively more acute adverse selection and moral hazard problems inherent in MBO lending increase the demand for monitoring via covenants, and that the closer the lenderlborrower relationship, the more effective the monitoring.

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The Causes and Consequences of Leveraged Management Buyouts

Cited by 70 publications

References 50 publications

Leveraged buyouts, private equity and jobs

Leveraged buyouts, private equity and jobs

Rethinking value creation in leveraged buyouts

Loan Covenants and Relationship Banking in MBOs

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