LBO Financing

48 Pages Posted: 26 Mar 2020 Last revised: 9 Jun 2021

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI); Swedish House of Finance

Henrik Petri

University of Bath

Multiple version iconThere are 2 versions of this paper

Date Written: May 7, 2021

Abstract

We analyze takeover financing in a model where bidders must overcome the free-rider problem to restore ownership incentives. Bootstrapping, ``excessive'' debt levels, and negative financing contributions by bidders -- the controversial traits of leveraged buyouts -- emerge as the Pareto efficient takeover bid design. Takeover debt is crucial to equity consolidation, Pareto sharing of the incentive gains, and efficient takeover competition, all while wealth constraints are slack. These benefits are unique to the market for corporate control, that is, absent outside of takeovers.

Keywords: Leveraged buyouts, bootstrap acquisitions, tender offers, free-rider problem, debt overhang, private equity

JEL Classification: G34, G32

Suggested Citation

Burkart, Mike C. and Lee, Samuel and Petri, Henrik, LBO Financing (May 7, 2021). Swedish House of Finance Research Paper No. 20-9, European Corporate Governance Institute – Finance Working Paper 698/2020, Available at SSRN: https://ssrn.com/abstract=3538825 or http://dx.doi.org/10.2139/ssrn.3538825

Mike C. Burkart

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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

Samuel Lee (Contact Author)

Santa Clara University - Leavey School of Business

500 El Camino Real
Santa Clara, CA California 95053
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Henrik Petri

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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