What Happens During the Private Period?: Evidence from Public‐To‐Private Reverse LBOs

14 Pages Posted: 26 Dec 2012

See all articles by Sudip Datta

Sudip Datta

Wayne State University - Finance Department

Mark Gruskin

Pennsylvania State University

Mai Iskandar‐Datta

affiliation not provided to SSRN

Date Written: Fall 2012

Abstract

This study provides new evidence on the restructuring activities undertaken by public‐to‐private reverse leveraged buyouts (RLBOs) while owned by private equity firms. The authors' comprehensive sample of public‐to‐private LBOs that return to public ownership through IPOs enables them to observe changes in profitability, valuation, financial structure, operating structure, and cost structure from the time the firms go private through (and after) their emergence through (re‐) IPOs. With their exclusive focus on reverse LBOs involving public‐to‐private deals, the authors reach findings that contradict previous conclusions about RLBOs. At the time of the LBO, the target firms in reverse LBOs are more levered than their peers, pay higher dividends, and are more profitable than their peers. At the same time, however, they appear to have lower market valuations before the buyouts. During the private period, the target firms of reverse LBOs achieve significant increases in employee productivity, asset restructuring, and improved gross margins, while operating with substantially higher levels of debt financing, lower levels of cash and working capital, and greater concentration of equity ownership. After the companies return to public ownership through IPOs, such companies continue to operate with higher leverage and ownership concentration than their publicly traded peers while producing further increases in profitability, resulting in substantial increases in both enterprise and equity valuation. The authors' analysis also shows that higher debt levels from the buyout play an important role in increased enterprise values. The evidence suggests that possible undervaluation as well as expected efficiency gains from restructuring actions are the primary motives for such reverse LBOs.

Suggested Citation

Datta, Sudip and Gruskin, Mark and Iskandar‐Datta, Mai, What Happens During the Private Period?: Evidence from Public‐To‐Private Reverse LBOs (Fall 2012). Journal of Applied Corporate Finance, Vol. 24, Issue 4, pp. 90-101, 2012, Available at SSRN: https://ssrn.com/abstract=2193856 or http://dx.doi.org/10.1111/j.1745-6622.2012.00403.x

Sudip Datta

Wayne State University - Finance Department ( email )

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Mark Gruskin

Pennsylvania State University

University Park
State College, PA 16802
United States

Mai Iskandar‐Datta

affiliation not provided to SSRN

No Address Available

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