17 Feb Do Leveraged Buyouts Help Or Hurt?
Before I delve into the hard-line research on how leveraged buyouts actually can add value, let me first cite a few quotes from industry-leaders to the contrary (you know, just to spice things up a bit).
- Source: Kaplan & Schoar (JF, 2005)
“[LBO funds earn returns] on fees, fees, fees. They invariably auction the business and are looking for strategic buyers. A strategic buyer is just someone who pays too much.“ –Warren Buffet [Emphasis added]
“Some buyout firms ply rape-and-pillage tactics.” -Forbes, 13 March 2006
“Private equity firms are a burden to the economy, to the community and a burden to the company and the employees.”
– Paul Maloney, Senior Organizer of UK union GMB
Now, that we have some peoples’ opinion on how LBOs are actually value destroying here are some results from a forthcoming paper by Harford and Kolasinski, stating that refutes the aforementioned statements. According to the paper, written by two B-school profs. at the University of Washington, LBO firms which were eventually sold to a strategic buyer actually create value. In addition, work by Cao and Learner support the same findings: LBOs really do add value and are not necessarily the result of “rape and pillage tactics.”
Here are some of the results:
- Source: Harford & Kolasinski (2011)
LBO targets taken public again in IPO’s generally outperform benchmarks in three years post-IPO (Cao & Learner, 2008) LBO targets sold to public strategic buyers see the buyer’s stock price go up upon acquisition announcement and there is no evidence of long-run underperformance after the acquisition has taken place (Harford & Kolasinski, 2010).
In instances when the LBO target is owned by a PE fund CAPX tends to decline (but CAPX is generally less sensitive to losses for LBO targets than for public control companies. In addition, there is a seen an improved ROA after the LBO has taken place (generally amounting to about 2%). Bankruptcy rate is also considerably low (hovering around ~15% or so). Finally, bankruptcy is generally unrelated to special dividends (Harford & Kolasinski, 2010).
- Source: Harford & Kolasinski (2011) & Cao and Lerner (2009)
So despite popular anti-LBO opinion, they can not only serve a purpose, but can also add value to organizations who engage in them. Perhaps it is our negative view on debt which turns us off to them. Or maybe it has something to do with the type of people who tend to engage in the — at least the stereotypes of those types of people. Or maybe it has something to do with what we are choosing to believe beyond the facts. I myself tend to believe that it is not the LBO that is adding the value itself, but the management put in place during the time an LBO takes place that adds the value. Or, the businesses just makes sense to someone who is able to see something that others do not–the diamond in the rough, so to speak. Whatever the case may be, LBOs certainly do have their place. Please let us know your opinion. Do LBOs add value or not?