Buying to Sell: A Theory of Buyouts
41 Pages Posted: 8 Jan 2010 Last revised: 26 Aug 2010
Date Written: August 23, 2010
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: Suggested Citation