1 / 41

Buy-to-Sell versus Buy-to-Keep: A Product Market Theory of Buyouts

Buy-to-Sell versus Buy-to-Keep: A Product Market Theory of Buyouts. Pehr-Johan Norbäck Lars Persson Joacim Tåg. Agenda. Introduction General Framework A Product Market Theory of Buyouts Takeaways. Introduction. Private Equity Buyouts (LBOs). Banks. Institutional Investors. Targets.

eileen
Download Presentation

Buy-to-Sell versus Buy-to-Keep: A Product Market Theory of Buyouts

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Buy-to-Sell versus Buy-to-Keep:A Product Market Theory of Buyouts Pehr-Johan Norbäck Lars Persson Joacim Tåg

  2. Agenda • Introduction • General Framework • A Product Market Theory of Buyouts • Takeaways

  3. Introduction

  4. Private Equity Buyouts (LBOs) Banks Institutional Investors Targets Private Equity Funds 6-10 year Targets Private Equity Partners

  5. Advantages • ”Active” owners • Managerial ownership • Debt • Monitoring Solvemanagerial agency problems

  6. Question Why do not public firms do the same?

  7. Our Contribution

  8. Develop a new framework • When do buy-to-sell owners emerge in equilibrium? • How does buying to sell affect strategic investments?

  9. A Product Market Theory of Buyouts • Why are buyout firms more ”active” owners than public firms? • Is ”active” ownership a reason for their existance? • Empirical predictions on differences in behavior

  10. The General Framework

  11. Buying to Sell or Buying to Keep Stage 1: Acquistion auction Buy-to-keep Buy-to-sell Stage 2: Investment Stage 3: Exit Stage 4: Long run

  12. Difference in Investment Incentives • Stage 2: First order conditions • Equal investments only if

  13. Ownership Depends on Investment • Stage 1: Valuations • Rankings:

  14. Application:A Product Market Theory of Buyouts

  15. Overview • Public firms buy to keep (have assets) • Buyout firms buy to sell (trade-sale exit) • Strategic investment is managerial ownership => Restructuring effort • Debt, monitoring also works (”active”)

  16. Structure and Timing Stage 1: Acquistion auction Incumbent Buyout Stage 2: Compensation contract Restructuring intensity Stage 3: Exit auction Stage 4: Product market interaction

  17. Stage 4: Product Market Competition • Firms maximize: • Nash-Equilibrium : • Reduced form profits:

  18. Assumption 1 • Restructuring improves competitiveness:

  19. Structure and Timing Stage 1: Acquistion auction Incumbent Buyout Stage 2: Compensation contract Restructuring intensity Stage 3: Exit auction Stage 4: Product market interaction

  20. Stage 3: Exit (Trade Sale) • First price perfect information auction • Incumbent valuation: • General: Restructured firm is obtained by an incumbent at price

  21. Structure and Timing Stage 1: Acquistion auction Incumbent Buyout Stage 2: Compensation contract Restructuring intensity Stage 3: Exit auction Stage 4: Product market interaction

  22. Stage 2: Compensation contract • CARA preferences: • Linear contract: • Maximization

  23. Stage 2: Managerial Ownership • Participation: • Costs:

  24. Stage 2: Managerial Ownership • Incumbent: • Buyout:

  25. Stage 2: Managerial Ownership Marginal profit and marginal cost Managerial ownership

  26. Structure and Timing Stage 1: Acquistion auction Incumbent Buyout Stage 2: Compensation contract Restructuring intensity Stage 3: Exit auction Stage 4: Product market interaction

  27. Result 1: Buyout firms more ”active” • Buyout firms more ”active” because they buy to sell • Stronger incentive contracts: • More restructuring:

  28. Structure and Timing Stage 1: Acquistion auction Incumbent Buyout Stage 2: Compensation contract Restructuring intensity Stage 3: Exit auction Stage 4: Product market interaction

  29. Stage 1: Equilibrium Ownership • Valuations • Buyout • Incumbent • Rankings:

  30. Stage 1: Equilibrium Ownership • Ownership depends on the sign of

  31. Result 2: Being ”Active” not enough • Buyout firms need an advantage to emerge in equilibrium (preemption) • Lower restructuring costs; more experience • Tax shield of debt

  32. Marginal profit and marginal cost Managerial ownership Net acquisition profits Managerial ownership

  33. Empirical Predictions

  34. Buyout firms • give management more intense incentive contracts • Monitors more and takes on more debt • Does more restructuring => better operational improvements • Preference for exit through a trade-sale if IPO costs are large and restructuring not too expensive.

  35. Evidence • More intense contracts • More debt and board representation • Higher operational and financial performance • Leslie and Oyer (2008): debt and m.ownership returns to ”normal”

  36. Other Applications of the Framework

  37. Applications • Reputational concerns: • Protecting innovations: • Asymmetric information:

  38. Takeaways

  39. General Framework • New framework for analysis of buy-to-sell and buy-to-keep ownership • Maximizing sales price often not the same as maximizing long run value • Affects investments, which in turn affects equilibrium emergence.

  40. Product Market Theory of Buyouts • Buyout firms are more ”active” owners because they buy to sell. • Optimal managerial ownership, debt and monitoring higher than at public firms • Returns to “normal” post exit • Being ”active” is not enough to outbid incumbents for assets • Preemptive motive • Expertise or tax shield needed

  41. Thank you for your time!

More Related