Buying to Sell: A Theory of Buyouts

41 Pages Posted: 8 Jan 2010 Last revised: 26 Aug 2010

See all articles by Pehr-Johan Norbäck

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Joacim Tåg

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 4 versions of this paper

Date Written: August 23, 2010

Abstract

Private equity firms are an important part of the industrial restructuring process. We argue that the key is temporary ownership. Buying to sell induces aggressive restructuring since the equilibrium trade sale price increases both because the profits of the acquiring incumbent increase and the profits of non-acquiring incumbents decrease. Therefore, private equity backed firms are more leveraged and have managers with more ownership as compared to incumbents. By being outsiders, private equity firms specialize in restructuring to outbid incumbents with incentives to preemptively acquire targets. Welfare effects of buyouts are ambiguous, but consumers gain from a buyout.

Keywords: Acquisitions, Buyouts, Buy-to-sell, Buy-to-keep, Leveraged Buyouts, Private equity, Take-overs, Temporary ownership

JEL Classification: G24, G32, G34, L1, L2

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars and Tåg, Joacim, Buying to Sell: A Theory of Buyouts (August 23, 2010). IFN Working Paper No. 817. Available at SSRN: https://ssrn.com/abstract=1532757 or http://dx.doi.org/10.2139/ssrn.1532757

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joacim Tåg (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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