The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions

CHAPTER 23

Going Private and Leveraged Buyouts

ONUR BAYAR

Assistant Professor of Finance, University of Texas at San Antonio

INTRODUCTION

In a public-to-private or a going-private transaction, a public company is acquired and subsequently delisted. Almost all such transactions are financed by borrowing substantial amounts of debt. Hence, they are called leveraged buyouts (LBOs). In a leveraged buyout, a company is acquired by a specialized investment firm using a relatively small portion of equity and a relatively large portion of external debt financing. LBO investment firms are generally referred to as private equity firms. In a typical LBO transaction, the private equity firm buys a majority control of an existing or mature public firm. In reality, however, LBOs comprise not only public-to-private transactions but also private firms that are bought by private equity firms.

LBOs emerged as an important phenomenon in the 1980s. As LBO activity increased in that decade, Jensen (1989) predicted that the leveraged buyout organizations would eventually become the dominant corporate organizational form. Jensen argued that LBO organizations combined concentrated ownership stakes, performance-based managerial compensation, highly leveraged capital structures, and active governance by private equity firms investing in them. According to Jensen, these structures are superior to those of the typical public corporation with dispersed shareholders, low leverage, and weak corporate governance. ...