Evidence of Competition in the Leveraged Buyout Market
28 Pages Posted: 20 Mar 2007
Date Written: March 12, 2007
We investigate the current leveraged buyout market in an effort to determine if the current market is overheated. Our evidence indicates that premiums paid in recent years are lower than those paid in the previous buyout wave of the 1980s. Furthermore, after controlling for firm-specific characteristics, we find that we are able to explain the cross-sectional differences in current premiums, and that there is little evidence of overpricing in the current market. We show evidence to indicate that buyout funds are targeting larger firms which indicates the pool of buyout targets is expanding. We also examine bank loans used to take firms private to determine if current targets are riskier firms than in years past. Our findings indicate that the price of risk, as measured by the credit spread, has increased since the buyout wave began. Loan maturities are shorter for riskier deals in the buyout wave than in the years prior to the buyout wave. These findings indicate that banks are becoming more sensitive to the underlying risk of buyout targets.
Keywords: Leveraged buyouts, corporate control
JEL Classification: G24, G34
Suggested Citation: Suggested Citation