Repeated LBOs: The Case of Multiple LBO Transactions
Kosedag, Arman, Michayluk, David, Quarterly Journal of Business and Economics
A sequence of actions is required to classify a firm as undergoing a repeated leverage buyout (LBO). The firm must be traded publicly, then must go private via an LBO, subsequently must obtain public status again through a new initial public offering, and finally must decide to go private again. This is a rare occurrence. Studies of LBOs aggregate all LBO transactions and do not distinguish between multiple transactions by the same company. These multiple LBO firms may exhibit different characteristics than first-time LBO firms because they have had experience in both the private and public markets. There are significant differences for firms that are undergoing repeated LBOs because their recent completion of the public to private cycle lends credibility to their action. It may be that there is less uncertainty for these finns because they are returning to the private sector, ostensibly to capitalize on some feature of being private that is not available in the public market. This reduction in uncertainty may be perceived by firm management because they have already experienced an LBO transaction.
LBO transactions typically have involved an owner/founder seeking to cash out his or her investment and transfer the firm to managers or younger family members, who would put up a small amount of capital and borrow the rest. Today, LBOs differ from their earlier incarnation because they involve companies that are large and publicly traded with many potential motivations. No single motivation for LBOs has been identified, but potential hypotheses include the alignment of managerial interests with stakeholder objectives, monitoring by sponsors/buyout specialists, dissemination of free cash flow, tax savings, and the elimination of public reporting, exchange registration, and listing expenses. In addition, the original motivation may not be realized because many LBOs subsequently return to the equity capital markets as a new initial public offering.
The appearance of repeated LBOs as a special category of LBO is important because the motivation for these LBO transactions may be clearer than for first-time LBOs. A repeated LBO provides more than one opportunity to observe the motivation for an LBO. The individuals involved may be the same in both cases, thereby providing a pattern of evidence regarding the motivation for the LBO. Halpern, Kieschnick, and Rotenberg (1999) suggest that not all finns do an LBO for the same reason. This group of firms may be a specific subset of companies, but, unfortunately, there is little research that has examined this area. Kosedag and Lane (2002) examine the applicability of the tax savings and free cash flow hypotheses of going private transactions to the repeated LBO decision. They replicate the Lehn and Poulsen (1989) study of going-private transactions and find that firms that repeat LBOs are less likely to have undistributed cash flow as a motivator to go private. This contrasts the Lehn and Poulsen finding that the mitigation of agency problems associated with Jensen's (1986, 1988) free cash flow hypothesis is a main motivation in LBO transactions. Repeated LBOs are not the same.
The market reaction to the announcement of a firm going private in a repeated LBO transaction is important for a number of reasons. First, as a subset of all LBO transactions, the market reaction can indicate if repeated LBOs engender a different reaction than first-time LBOs. We hypothesize that repeat LBOs will he viewed more positively because these are firms with expertise in a usually unrepeated transaction. Second, market reaction can be linked to publicly available accounting data hypothesized to explain LBO transactions. The correlation between the magnitude of the reaction and the possible explanatory variables may lend insight into the perceived benefits of the repeated LBO. Third, differentiating between first-time and repeated LBOs is important from an economic perspective because perceptions of repeated exploitation may trigger public outcry and possible regulation. …