Corporate Restructuring: Breakups and LBOs

HANDBOOK OF CORPORATE FINANCE: EMPIRICAL CORPORATE FINANCE, Vol. 2, Chapter 16, pp. 431-496, B. E. Eckbo, ed., Elsevier/North-Holland Handbook of Finance Series, 2008

Tuck School of Business Working Paper No. 2008-49

86 Pages Posted: 15 May 2008 Last revised: 23 Feb 2011

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Abstract

This essay surveys the empirical literature on corporate breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). Many breakup transactions are a response to excessive conglomeration and reverse costly diversification discounts. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the turn of the century create value similar to LBOs of the 1980s. Recent developments include club deals (consortiums of LBO sponsors bidding together), fund-to-fund exits (LBO funds selling the portfolio firm to another LBO fund), a highly liquid (until mid-2007) leveraged loan market, and evidence of persistence in fund returns (perhaps because brand-sponsors borrow at better rates). The perhaps greatest challenge to the restructuring literature is to achieve a modicum of integration of the analysis across transaction types. Another challenge is to produce precise estimates of the expected return from buyout investments in the presence of limited data on those portfolio companies which do not return to public status.

Keywords: Restructuring, breakup, divestiture, spinoff, equity carveout, tracking stock, leveraged

JEL Classification: G32, G34

Suggested Citation

Eckbo, B. Espen and Thorburn, Karin S., Corporate Restructuring: Breakups and LBOs. HANDBOOK OF CORPORATE FINANCE: EMPIRICAL CORPORATE FINANCE, Vol. 2, Chapter 16, pp. 431-496, B. E. Eckbo, ed., Elsevier/North-Holland Handbook of Finance Series, 2008; Tuck School of Business Working Paper No. 2008-49. Available at SSRN: https://ssrn.com/abstract=1133153

B. Espen Eckbo

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Karin S. Thorburn (Contact Author)

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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