LBO Financing

72 Pages Posted: 26 Mar 2020 Last revised: 2 Nov 2023

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Finance Theory Group (FTG); 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: September 7, 2023

Abstract

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

Burkart, Mike C. and Lee, Samuel and Petri, Henrik, LBO Financing (September 7, 2023). 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

Finance Theory Group (FTG) ( email )

United States

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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