Buying to Sell: A Theory of Buyouts

Private equity owned firms have more leverage, more intense compensation contracts, and higher productivity than comparable firms. We develop a theory of buyouts in oligopolistic markets that explains these facts. Private equity firms are more aggressive in inducing restructuring compared to incumbents since they maximize a trade sale price. The equilibrium trade sale price increases in restructuring not only by increasing the profit of the acquirer, but also by decreasing the profits of non-acquiring firms. Predictions on the exit mode and on when private equity firms can outbid incumbents in the market for corporate control are also derived.

Introduction: Private equity firms are an important part of the industrial restructuring process that is taking place in all industries across the world. Davis et al. (2009) show that around 2% of US non-farm employees worked in a private equity backed firm in 2005 and that productivity on average grows by about two percentages points more at private equity backed firms than at comparable firms in the manufacturing industry during two years after the transaction. Bloom et. al (2008) present evidence that private equity backed firms excel in people and operations management practices; skills that are important when restructuring activities are undertaken.

Author: Pehr-Johan Norbäck,Lars Persson, Joacim Tag

Source: Research Institute of Industrial Economics

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