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The Longer-Term Effects of Management-Led Buy-Outs

Author

Listed:
  • Mike Wright

    (Center for Management Buy-Out Research, U Nottingham)

  • Nick Wilson

    (University of Bradford)

  • Ken Robbie

    (Center for Management Buy-Out Research, University of Nottingham)

Abstract

There is now extensive evidence on short-term performance improvements in buy-outs, but little relating to the longer-term. This paper examines the relatively neglected area of the longevity and longer-term effects of smaller buy-outs. In terms of longevity, the evidence presented shows that the majority remain as independent buy-outs for at least eight years after the transaction, and that entrepreneurial actions concerning both restructuring and product innovation are important parts of entrepreneurs' strategies over a ten year period or more. For the first time, the paper also provides an analysis of the financial performance and productivity of a large sample of buy-outs and non-buyouts. It shows that on a variety of financial ratios buy-outs significantly outperform a matched sample of non-buy-outs, especially from year 3 onwards. Analysis of post buyout efficiency of survivor buy-outs, using regression analysis to estimate augmented Cobb-Douglas production functions, shows that buy-outs are superior to matched nonbuy-outs with a productivity differential of the order of 9% on average from year t+2 onwards. The evidence of superior longer term performance suggests that venture capitalists may need to consider their investment perspectives carefully, particularly in respect of exit versus second round investment. For financiers it is clear that the buy-out concept can be successfully applied to growth as well as restructuring cases.

Suggested Citation

  • Mike Wright & Nick Wilson & Ken Robbie, 1996. "The Longer-Term Effects of Management-Led Buy-Outs," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(3), pages 213-234, Fall.
  • Handle: RePEc:pep:journl:v:5:y:1996:i:3:p:213-34
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    References listed on IDEAS

    as
    1. Steven N. Kaplan, 1993. "The Staying Power Of Leveraged Buyouts," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 15-24.
    2. Lichtenberg, Frank R. & Siegel, Donald, 1990. "The effects of leveraged buyouts on productivity and related aspects of firm behavior," Journal of Financial Economics, Elsevier, vol. 27(1), pages 165-194, September.
    3. Zahra, Shaker A., 1995. "Corporate entrepreneurship and financial performance: The case of management leveraged buyouts," Journal of Business Venturing, Elsevier, vol. 10(3), pages 225-247, May.
    4. Palepu, Krishna G., 1990. "Consequences of leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 27(1), pages 247-262, September.
    5. Tim C. Opler, 1992. "Operating Performance in Leveraged Buyouts: Evidence From 1985 - 1989," Financial Management, Financial Management Association, vol. 21(1), Spring.
    6. Jones, C. Stuart, 1992. "The attitudes of owner-managers towards accounting control systems following management buyout," Accounting, Organizations and Society, Elsevier, vol. 17(2), pages 151-168, February.
    7. Ooghe, Hubert & Manigart, Sophie & Fassin, Yves, 1991. "Growth patterns of the European venture capital industry," Journal of Business Venturing, Elsevier, vol. 6(6), pages 381-404, November.
    8. Wright, Mike & Thompson, Steve & Robbie, Ken, 1992. "Venture capital and management-led, leveraged buy-outs: A European perspective," Journal of Business Venturing, Elsevier, vol. 7(1), pages 47-71, January.
    9. Thompson, R S & Wright, Mike & Robbie, Ken, 1992. "Management Equity Ownership, Debt and Performance: Some Evidence from UK Management Buyouts," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(4), pages 413-430, November.
    10. Malone, Stewart C., 1989. "Characteristics of smaller company leveraged buyouts," Journal of Business Venturing, Elsevier, vol. 4(5), pages 349-359, September.
    11. Conte, Michael A. & Svejnar, Jan, 1988. "Productivity effects of worker participation in management, profit-sharing, worker ownership of assets and unionization in U.S. firms," International Journal of Industrial Organization, Elsevier, vol. 6(1), pages 139-151, March.
    12. Thompson, Steve & Wright, Mike, 1995. "Corporate Governance: The Role of Restructuring Transactions," Economic Journal, Royal Economic Society, vol. 105(430), pages 690-703, May.
    13. Jones, Derek C & Kato, Takao, 1995. "The Productivity Effects of Employee Stock-Ownership Plans and Bonuses: Evidence from Japanese Panel Data," American Economic Review, American Economic Association, vol. 85(3), pages 391-414, June.
    14. Muscarella, Chris J & Vetsuypens, Michael R, 1990. " Efficiency and Organizational Structure: A Study of Reverse LBOs," Journal of Finance, American Finance Association, vol. 45(5), pages 1389-1413, December.
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    Cited by:

    1. repec:eee:pacfin:v:43:y:2017:i:c:p:107-123 is not listed on IDEAS
    2. Kamoto, Shinsuke, 2017. "Managerial innovation incentives, management buyouts, and shareholders' intolerance of failure," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 55-74.
    3. repec:spr:jbecon:v:88:y:2018:i:3:d:10.1007_s11573-017-0886-0 is not listed on IDEAS

    More about this item

    Keywords

    Management-Led Buy-Outs; MBO; LBO;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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