The performance of reverse leveraged buyouts: An agency perspective

Thøger Dam Johansen

Student thesis: Master thesis

Abstract

Although buyouts have been widespread since the early 1980’s, relatively little attention in systematic studies has been paid to the long term performance of LBOs after the buyout funds exit their investments. When buyout funds initiates exit through an IPO the ownership structure is again dispersed, and the performance gains, which have frequently been suggested to be associated with the ability of buyout fund ownership to mitigate agency costs, could be reversed. That is, if agency costs were mitigated during buyout fund ownership, then they could be expected to reappear following an IPO, as ownership is again dispersed. Using a sample of 103 RLBOs from 2000 to 2007, the ex post IPO performance is examined and the explanatory power of the agency perspective is assessed. Investigating the development in ownership structure, leverage and accounting performance following the IPO show a pattern of convergence between the levels of the RLBO sample and those of a sample of IPOs matched on industry affiliation and pre-event size and performance. That is, in the areas in which the RLBOs are distinct due to their previous buyout fund ownership, i.e. leverage, the levels approach those of the matched sample following the IPO. Agency theory, following Jensen (1989), suggests ownership structure and leverage as determinants of performance. Following the IPO, the median ownership structure RLBOs, measured as the percentage holdings of the largest shareholders and the difference in voting power between these shareholders, approaches that of the matched sample. Similar patterns are found for the developments in leverage, net working capital, CAPEX and free cash flow. These patterns could indicate an increased agency presence, as the relative incentive for management to divert funds ex post IPO are increased, as the incentive and ability of the buyout fund to monitor and correct managerial behavior is reduced as a result of control being relinquished. Cross-sectional regression analysis shows a significant (though weak) negative association between ownership concentration and stock performance, which could indicate that following the IPO, the negative effects associated with entrenchment amongst shareholders dominate the anticipated positive effects of having large shareholders with the ability and incentive to monitor and correct managerial behavior. The agency perspective can thus be applied to explain the ex post IPO performance of RLBOs but the dominant agency problem following the IPO appears to be that of entrenchment.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2010
Number of pages76