Recent years have seen a dramatic increase in the number of management buyouts facilitated by third-party equity investors. Such buyouts typically involve corporations that are larger—in total revenues, total assets and market value—than corporations that go private without the participation of third-party investors. Furthermore, they tend to be accompanied by material increases in corporate debt and have thereby come to be known as leveraged buyouts (LBOs).
The ownership structures of LBOs are designed both to protect the parties that have provided needed capital and to improve managers’ incentives, hence performance. The former goal is often accomplished via the intermediation of LBO specialists, the latter by increasing managers’ share of common stock. Typically, an LBO will be followed within several years by another major ownership restructuring—with third-party investors selling their interest to management, an Employee Stock Ownership Plan or other third parties.
A variety of underlying economic considerations affect the decision to go private. On one hand, going private can result in improved company performance, tax savings and potential improvement in the company’s competitive position. On the other hand, a privately held company may face difficulties in raising capital and in attracting competent managers. In the transition to private ownership, moreover, managers face various legal and regulatory hurdles designed to mitigate the conflicts of interest inherent in LBOs.
