Agency, Strategic Entrepreneurship, and the Performance of Private Equity-Backed Buyouts
Meuleman, Miguel, Amess, Kevin, Wright, Mike, Scholes, Louise, Entrepreneurship: Theory and Practice
Agency theory has focused on buyouts as a governance and control device to increase profitability, organizational efficiency, and limited attention to growth. A strategic entrepreneurship view of buyouts incorporates upside incentives for value creation associated with growth as well as efficiency gains. In this paper, we develop the complementarity between agency theory and strategic entrepreneurship perspectives to examine the performance implications for different types of buyouts. Further, we study how the involvement of private equity (PE) firms is related to the performance of the post-buyout firm. These issues are examined for a sample of 238 PE-backed buyouts in the UK between 1993 and 2003. Implications for theory and practice are suggested.
Private equity (PE)-backed buyouts have been perceived historically as an efficiency tool to streamline organizational processes, reduce workforces and decrease unit costs (Harris, Siegel, & Wright, 2005; Wright, Hoskisson, & Busenitz, 2000). PE-backed buyouts involve investments in which investors and a management team pool their own money (usually together with debt finance) to buy shares in that company from its current owners to create a new independent entity. Agency theory has been the predominant theoretical lens used to study buyouts, with emphasis on controlling and incentivizing managers' behavior to improve performance (Fox & Marcus, 1992; Jensen, 1993). This contrasts sharply with mature, public firms where weak corporate governance and managerial incentives can lead to the destruction of firm value.
Besides being efficiency enhancing, buyouts may also be a vehicle for strategic innovation and renewal that fosters upside entrepreneurial growth opportunities (Wright, Hoskisson, Busenitz, & Dial, 2001). While an agency perspective allows for consideration of growth, the agency controls involved in PE transactions, such as high leverage and financial monitoring, may stifle strategic flexibility and risk taking associated with growth (Jensen & Meckling, 1976).
A strategic entrepreneurship perspective, grounded in the resource-based view of the firm, provides recognition of the resources required to exploit growth opportunities in order to create and sustain competitive advantage (Ireland, Hitt, & Sirmon, 2003). The complementarity between agency and resource-based perspectives of the firm are well-recognized (Castanias & Helfat, 1991; Mahoney & Pandian, 1992; Makadok, 2003); in particular, strong governance and strong resources in the form of human capital competences may be especially important in generating performance (Makadok). Exploring the complementarity between agency and strategic entrepreneurship perspectives with respect to buyouts provides richer insights than would be gained from using only one perspective. These perspectives have not hitherto been combined in the context of PE-backed buyouts.
Previous studies have typically used an agency perspective because they largely focused on "going private" buyouts of entire firms that were publicly traded (Jensen, 1989). Buyouts of publicly traded companies, however, account for only a minority of buyouts in the United States and are relatively rare in other countries (Wright et al., 2007). Indeed, other types of buyouts, including divisional buyouts, family buyouts, and secondary buyouts have largely been neglected in previous research. This heterogeneity of buyout types offers considerable opportunity for change and entrepreneurial pursuits that extend traditional agency theory explanations for buyouts. These different types of buyouts have emerged because they are an efficient and effective means of needed organizational change (Wright, Hoskisson, et al., 2000).
Synthesizing agency and strategic entrepreneurship perspectives, the first research question we examine is: How do different types of PE-backed buyout transactions impact post-buyout performance? …