PERFORMANCE LEVERAGE, AND OWNERSHIP STRUCTURE IN REVERSE LBOs

Previous studies have provided convincing evidence of improvements in the performance of companies that undergo leveraged buyouts (LBOs). This article presents evidence from the authors' recent study of the performance of 90 “reverse LBOs–LBO firms that go public again in an IPO—after they return to public ownership. The aim of the study was to track the performance of reverse LBOs and to reveal any association between operating performance and changes in leverage and equity ownership. Among the principal findings of the study were the following: Despite a substantial decline in leverage ratios and equity ownership by insiders at the time of the IPOs, equity ownership of reverse LBOs remained more concentrated and leverage higher than that of public companies in the same industries. The operating performance of reverse LBOs was significantly better than that of the median firm in their industries in the year prior to and in the year of the IPO. Although there is some evidence of a deterioration in the performance of the reverse‐LBO firms, they continue to outperform their industry competitors for at least four full fiscal years after the IPO. Greater reductions in the percentage equity owned by managers and other insiders at the time of the reverse LBO are associated with larger declines in operating performance. The stock price performance of reverse LBOs after going public appears more “rational” than that of other IPOs—that is, there is less initial under pricing and no sign of the negative, longer‐term abnormal returns reported by recent studies of IPOs.