Buyout or Sit Out? - A Study on LBO Motives and Firm Characteristics of Buyout Targets in a Boom Period and in a Financial Crisis

Sammanfattning: The subject of leveraged buyout (LBO) motives and value creation following LBO transactions has been a frequent topic in the corporate finance literature ever since the LBO phenomenon gained foothold in the society during the 1980s. The distinguishing factors between firms that go private through an LBO and comparable companies that stay in public ownership have been investigated. However, the results have rarely been compared across time periods and between industries. In this thesis, we seek to fill that gap in the existing literature by not only investigating the distinguishing factors between LBO firms and public firms, but also by separating and comparing the results of two distinct time periods in terms of LBO activity; the boom period of 2006 to 2007 and the financial crisis of 2008 to 2010, and of two industries; the manufacturing and the service industry. Using a sample of 145 LBO transactions in the US between 2006 and 2010, we compare the pre-LBO characteristics of firms that went private through an LBO with those of comparable firms that remained public. We find that there are distinguishing characteristics between LBO firms and public firms, most notably in that LBO firms have lower growth prospects and higher potential tax benefits. However, the characteristics of LBO firms, and hence the LBO motives, are sensitive both to time period and to industry. The results indicate that LBO motives cannot properly be generalized, which arguably explains the lack of consistent results in earlier research. We believe that future research could benefit from taking into account the sensitivity of LBO motives with regards to the macroeconomic environment and to industries.