Finance Papers

Document Type

Journal Article

Date of this Version

7-25-2013

Publication Source

Foundations and Trends® in Finance

Volume

7

Issue

3

Start Page

159

Last Page

288

DOI

10.1561/0500000028

Abstract

We survey the empirical literature on corporate financial restructuring, including breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). For each transaction type, we survey techniques, deal financing, transaction volume, valuation effects and potential sources of restructuring gains. Many breakup transactions appear to be a response to excessive conglomeration and attempt to reverse a potentially costly diversification discount. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the 1990s on average create value similar to LBOs of the 1980s. Recent developments include consortiums of private equity funds (club deals), exits through secondary buyouts (sale to another LBO fund), and evidence of persistence in fund returns. LBO deal financing has evolved toward lower leverage ratios. In Europe, recent deals are financed with less leveraged loans and mezzanine debt and more high-yield debt than before. Future research challenges include integrating analyses across transaction types and financing mixes, and producing unbiased estimates of the expected return from buyout investments in the presence of limited data on portfolio companies that do not return to public status. DOI:10.1561/0500000028

Copyright/Permission Statement

© 2013 B. E. Eckbo and K. S. Thorburn

Comments

author Karin S. Thorburn is affiliated with the Norwegian School of Economics, Norway. She is also a visiting faculty member in the Finance Department of the Wharton School at the University of Pennsylvania.

Embargo Date

7-25-2014

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Date Posted: 27 November 2017

This document has been peer reviewed.