Corporate governance through leveraged buyout (LBO): Motives, determinants and pre-LBO characteristics of firm
Corporate governance through buyout of firms with a substantial amount of debt financing--known as 'leveraged buyout' (LBO)--has evolved into an important financial phenomenon. The present research conducts an empirical and analytical investigation into the nature, motives, determinants and impacts of LBO, using a logit binomial probability model and a choice-based sampling technique. The study examines samples of publicly held firms which experienced LBO from 1987-1989 and of firms remaining public as of 1989. Firms susceptible to LBO have a distinct set of characteristics. First, pre-LBO firms are typically focused in a core business with multiple operating units. Second, firms with high free cash flow are LBO targets, as well as firms with low earning capacity caused by non-cash items. Third, LBO candidates are characterized by low growth and stability of revenue stream. Fourth, LBO target firms are bought out because of their own specific characteristics, not because of an industry disturbance effect. Fifth, pre-LBO firms have high management equity holdings. Sixth, LBO eligibility decreases with firm size. Seventh, highly-leveraged firms are likely candidates for LBO since management has already proven its ability to manage a firm with high debt. Eighth, firms with a high level of liquidity are better able to maintain high debt coverage and therefore make good LBO candidates. Ninth, under new tax laws, firms with a stepped-up asset basis no longer yield tax benefits, and so are not sensitive targets for LBO. LBO restructures ownership, creates a new capital structure, and begets refocused firms, profoundly affecting missions, objectives, and strategic decisions. The change in ownership structure aligns the interests of management and other stakeholders. The non-public status of LBO firms creates favorable corporate culture for operation. The changes in capital structure result in substantial debt, creating a strong bonding mechanism for managers and refocusing LBO firms toward generating cash flow. As a result of these changes, morale, teamwork and work quality also improve.
Socatiyanurak, Vorapol, "Corporate governance through leveraged buyout (LBO): Motives, determinants and pre-LBO characteristics of firm" (1992). Dissertations available from ProQuest. AAI9227770.