- Item type
- Dissertation/ Thesis
- Language
- English
- Journal
- University of St. Gallen, Business Dissertations. 2005, p1-414. 414p. 5 Black and White Photographs, 13 Diagrams, 75 Charts, 131 Graphs.
- Publication year
- 2005
- Subjects
-
- Leveraged buyouts
- Value (Economics)
- Mergers & acquisitions
- Mutual funds
- Private equity
- Capital market
- Investment advisors
- Business planning
- Strategic planning
This study addresses sources of value creation in leveraged buyouts. Prior studies in the field of Private Equity -- and especially buyout -- research broadly suffered from a lack of accessibility to the highly confidential buyout deal and fund performance data of Private Equity firms. Following the establishment of a few selective, successful research collaborations with leading Private Equity Fund investors (Limited Partners) and subsequent access to their vast archives of collected information, including obtained performance data, this study sheds light on the performance dynamics of a sample of more than 3,000 realized and unrealized leveraged buyout transactions, undertaken by 84 of the major buyout-focused U.S. and European Private Equity firms, drawn from 252 of these firms' funds between 1973 and 2003, with the majority of recorded transactions taking place during the 1990s. The study addresses value creation drivers according to three dimensions: (i) exogenous, i.e. capital market-, industry-, financial- and acquisition-related value drivers, (ii) endogenous, i.e. buyout investment manager and buyout firm profile as well as experience related drivers, and (iii) buyout acquisition strategy related value drivers. The theoretical part reviews two competing explanations for the phenomenon of apparently significantly higher value generation and return out-performance of leveraged buyouts undertaken by financial buyers, when weighed against comparable companies on the one side, as well as compared to common merger and acquisition activity of strategic buyers on the other side. The agency theoretical explanation is established around the far-reaching changes in corporate governance regimes at buyout targets post acquisition: the frequent use of managerial incentives act as stimuli for closer management supervision and control on the one side, and as a mean to initiate more radical strategic change on the other side. By contrast, the strategic management view is centred around the fact that in the event of a complete absence of synergies that would drive acquisition rationales of strategic buyers, the interaction and knowledge transfer between the LBO firm and its portfolio companies as well as the development of an acquisition competence on part of the LBO organization must be seen as most important available source for the observed degree of value generation. Subsequently, the theoretical part continues by providing an in-depth overview of possible direct and indirect drivers of value creation or value destruction in leveraged buyouts, based on the universe of available buyout literature. The theoretical section also offers a framework to analyse leveraged buyout transactions and introduces the "leveraged buyout value attribution formula", a deduction from the Dupont formula that makes explicit the relative sources of value generation in a particular buyout. The empirical part is structured into three main chapters alongside the above identified three dimensions of potential sources of value creation. The first empirical chapter starts with an overview of the universe of leveraged buyout transactions, assembled by Private Equity information provider Thomson Financial Venture Economics, with respect to Private Equity fundraising and fund performance history. Subsequently, based on the primary transaction dataset collected from Limited Partners, the study finds evidence that several of the herein examined exogenous factors such as entry and exit years, entry and exit types and modes, industry, country/origin, amount of invested capital, percentage of ownership, holding period, acquiring GP firm, industry and equity market performance, as well as industry financial development, have demonstrated to be (statistically) significant value/performance drivers in the leveraged buyout value creation process, as measured by the dependent variable gross deal performance's internal rate of return (IRR). The second empirical chapter introduces endogenous factors of value creation, focusing on the LBO organization and its members. The Private Equity firms examined in this study were screened with a view on their investment managers' level and type of education, professional experience as well as the buyout firm's hierarchical homogeneity/diversity and organizational deal-making experience profile. The study finds evidence that the professional experience, and to a lesser degree the investment managers' education, has a significant impact on expected returns. In addition, the LBO firm's organizational structure, team composition and diversity vs. homogeneity configuration are found to play an important role from a return perspective. Detailed, previously unpublished descriptive results with respect to profiling characteristics of investment manager backgrounds and LBO firm organizations are presented. Moreover, in contrast to earlier findings from the M&A literature field, this study uncovers evidence for the existence of a learning effect in executing buyout transactions. While a long transaction experience track record (often associated with more established funds) and geographic investment focus proves to be positively correlated to performance, a focus limited to one or few industries does not. These findings collectively underline the existence of a "GP effect" in leveraged buyouts. The third and final chapter of the empirical part presents descriptive and statistical results published for the first time in this form of an analysis of leveraged buyouts' strategic value drivers, i.e. what observable strategies do buyout firms follow and which buyout target characteristics and strategic deal decisions may lead to higher value creation. Despite being partially restricted by lower subsample sizes for a few of the analyzed independent variables (and hence accompanied by lower statistical significance levels), the exploratory micro-level analysis in this study offers several surprising results regarding buyout target characteristics, affirming both prior agency theoretical and to a lesser extent strategic management theory oriented M&A literature. The analysis of strategic measures in the critical post-acquisition management phase demonstrates that an exchange of top management teams as well as growth oriented (also through add-on acquisitions) rather than cost cutting strategies will benefit buyout transaction returns. Overall, the agency theoretical explanation of superior returns in leveraged buyout finds stronger evidence. In summary, the presented study's research approach has been of exploratory nature and its main contributions to theory and practice can be seen in the developed three-pillared conceptual framework, an unparalleled sample size compared to any study in Private Equity research (as known by the author at this time) as well as the magnitude of previously unpublished descriptive and statistical findings regarding performance of leveraged buyout transactions. The consistently high levels of statistical significance further support the chosen research design. Each of the three chapters of the empirical results part is thereby seen as major ground to further deepen the understanding of academia and practitioners in the future. Moreover, this study has also intentionally omitted one area of potential future research: the acquisition-related dynamics and interactions initialized through the buyout firm on the portfolio company management level. [ABSTRACT FROM AUTHOR]