72 Pages Posted: 26 Mar 2020 Last revised: 2 Nov 2023
Date Written: September 7, 2023
We rationalize why leverage in buyouts differs from corporate leverage at large by merging two strands of buyout theory that focus on problems of public ownership: the Berle-Means problem (lack of incentives) and the Grossman- Hart problem (free-riding). We derive in such a framework the novel result that the combination of bootstrapping, very high leverage, and upfront cashouts is socially optimal and increases buyout premia. This buyout structure mimics a management contract, paying a bidder (e.g. a private equity firm) upfront cash and stock to manage the target, with the cash portion funded by debt imposed on the target.
Keywords: Leveraged buyouts, bootstrap acquisitions, tender offers, free-rider problem, debt overhang, private equity
JEL Classification: G34, G32
Suggested Citation: Suggested Citation