Active Investors, LBOS, and the Privatization of Bankruptcy
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Journal of Applied Corporate Finance, Vol. 2, No. 1, pp. 35-44, Spring 1989
Harvard NOM Research Paper No. 00-08
A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000
From the 1960s to the 1980s the corporate control market generated considerable controversy, first with the merger and acquisition movement of the 1960s, then with the hostile tender offers of the 1970s and most recently, with the leveraged buyouts and leveraged restructurings of the 1980s.
These control transactions are the manifestation of powerful underlying economic forces that, on the whole, are productive for the economy. Thorough understanding is made difficult by the fact that change, as always, is threatening - and in this case the threats disturb many powerful interests.
One popular hypothesis offered for the current activity is that Wall Street is engineering transactions to buy and sell fine old firms out of pure greed. The notion is that these transactions reduce productivity, but generate high fees for investment bankers and lawyers. The facts do not support this hypothesis even though mergers and acquisitions professionals undoubtedly prefer more deals to less, and thus sometimes encourage deals (like diversifying acquisitions) that are not productive.
There has been much study of corporate control activity, and although the results are not uniform, the evidence indicates control transactions generate value for shareholders. The evidence also suggests that this value comes from real increases in productivity rather than from simple wealth transfers to shareholders from other parties such as creditors, labor, government, customers or suppliers.
My purpose here is to outline an explanation of the fundamental underlying cause of this activity that has to date received no attention. In this paper I define active investors, explain their fundamentally important role in generating corporate efficiency, show how current corporate control activity is part of a larger set of economic changes sweeping the world, provide perspective on how LBOs, restructurings, and increased leverage in the corporate sector fit into the overall picture, and discuss some reasons why high debt ratios and insolvency are less costly now than in the past. Because of its topical relevance, I pay particular attention to LBOs and their role in the restoration of competitiveness in the American corporation.
Number of Pages in PDF File: 11
Keywords: Active Investors, Investors, Mergers and Acquisitions, Control Transactions, Corporate Control Activity, Takeover Activity, Corporate Efficiency, LBOs, Restructurings
JEL Classification: G34
Date posted: October 12, 2000