Post-LBO Development

Analysis of Changes in Strategy, Operations, and Performance after the Exit from Leveraged Buyouts in Germany

verfasst von: Richard K. Lenz

Verlag: Gabler

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

Private Equity and leveraged buyouts have become common in Europe, including in particular Germany. They are a catalyst for corporate restructuring and growth. Over time, financial investors have started to exit their investments. The development of some former LBOs raises the question whether the financial investors traded lo- term growth against short-term cash flow and expropriated value. Financial investors are further accused of reducing employment, cutting salaries, offshoring production, and leaving companies financially instable. Researchers have questioned the sustainability of performance improvement and tested changes in performance indicators. The findings confirm that the financial performance of former LBOs declines. The decline occurs with a time lag, but research fails to explain in detail its determinants of this decline. In particular, the decline seems to be caused by increase strategy diversification, the recurrence of inefficiencies and reduced management focus on efficiency. These observations are limited to companies that exit through a public offering, not through a trade sale. This study seeks to enhance completeness and precision of research into the post-exit period. Given the secrecy of the industry, no empirical data has been gathered that in detail analyses how the way the LBOs are supervised and managed changes at the exit. Research on the subsequent changes in strategy and operations is sparse and limited to those companies pursuing a public offering. A greater understanding of the source of performance development requires further plowing through major corporate activities.

Inhaltsverzeichnis

Frontmatter

A. Introduction and Founding Theory

Abstract

Leveraged buyouts (LBOs) have become common in Europe, including in particular Germany. They are a catalyst for corporate restructuring and growth, and typically involve equity from professional managed partnerships. Some EUR 21.6 billion was invested in German LBOs by 2006, thereof the five largest transactions accounted for EUR 12.5 billion.

Richard K. Lenz

B. Model Building and Hypotheses Development

Abstract

Finance researchers have formulated and analyzed scores of hypotheses for a company going-private. However, only partial aspects have been discussed in the light of the handover to a new ownership regime after a buyout. The author will decompose the model into four levels of analysis: (1) post-exit changes in governance structure (hypotheses 1 to 5); (2) the effect of a new governance structure on management objectives (hypotheses 6 to 12); (3) the effect of a new governance structure on managerial activities and applied levers of value, both strategic and operational (hypotheses 13 to 28); and, (4) the effect of a new governance (post-exit) structure on corporate performance (hypotheses 29 and 30). The following figure illustrates the hypotheses and assumed relationships. These will be presented in the subsequent chapters and delved into in the upcoming case studies.

Richard K. Lenz

C. Empirical Part

Abstract

The initial sample consisted of all LBOs in Germany where buyout investors had exited as (dominant) owner before 2004. This ensured a post-exit investigation period of at least three complete fiscal years in respect to the data consolidation at the end of 2007. Since the LBO governance structure is required to be decisive on management’s objectives and corporate policy-making, a minimum holding period of three years by the buyout investors was demanded. Hence, the companies at the earliest entered into the buyout in 2001. As a precautionary measure, the author also cuts the sample to an earliest exit in 1999, since one would expect that the quality and consistency of data, in particular the self-assessment by management, deteriorates with increasing time. In the next step, the sample was adjusted to those buyouts that exited either through a trade sale or through a going-public. Finally, those cases where the buyout investors continued to hold a significant share of equity were deleted.

Richard K. Lenz

D. Synthesis and Outlook

Abstract

Since the emergence of leveraged buyouts as a new form of organization with enhanced incentives and monitoring, researchers have questioned how sustainable any performance improvement is and whether any increase in value purely is a wealth transfer to the disadvantage of other parties involved. Post-exit performance depends on the new management structure of the former buyout. The motives and efforts of parties involved - managers, employees, and owners – depends on their share of benefits related to the company and the individual utility function. The interesting question, therefore, was whether changes at the exit are a return to the pre-LBO structure or the birth of a significantly different governance structure allowing post-LBO superior performance. The author has investigated the changes in governance, strategy, operations and performance after the exit from a leveraged buyout structure based on three case studies in Germany. This concluding chapter summarizes the insights that can be drawn from the preceding analysis.

Richard K. Lenz

Backmatter

Titel: Post-LBO Development
verfasst von: Richard K. Lenz
Verlag: Gabler
Electronic ISBN: 978-3-8349-8600-9
Print ISBN: 978-3-8349-2163-5
DOI: https://doi.org/10.1007/978-3-8349-8600-9