Financing patterns of European Buy-Outs

Inhaltsangabe:Introduction: The 1980’s saw the creation of a new form of corporate takeover: Leveraged Buy-Outs. Extensively discussed, they led to a widespread public debate on corporate governance in the US that culminated in a 1989 congressional hearing on the possible implications of leveraged Buy-Outs for the economy. The public picture was clear: The ‘Barbarians at the Gate’ travelled in pin-striped suits knocking on executives’ doors while asking for their seat in the corporate boardroom. Actions such as, paying for acquisitions with borrowed money, cutting jobs, stealing tax money from the state through increased leverage and selling the firms after a couple of years for a huge profit, all contributed to the image of LBO financiers as corporate raiders. Not only within the public spectre, but moreover, economic literature seriously criticised the one-off gains and zero-sum sources of value associated with leveraged Buy-Outs. Summers labels the private benefit of LBO shareholders as being achieved at the expense of other stakeholder groups, misevaluations and future growth opportunities. Despite this, advocates of this new form of organisation were to be found. Not only did investors searching for higher returns in a low interest environment, welcome the advent of the LBO asset class, but moreover literature began to develop awareness of the benefits of those transactions. The solution to acute incentive problems found in public corporations, which this new form of takeover was able to offer led Jensen to remark: ‘The last share of publicly traded common stock will be sold in 2003’. Knowledge of this new acquisition technique quickly began to reach Europe and by 1989 the total value of Buy-Out transactions undertaken reached €bn 6.5 in the old continent, a 70% year on year increase from 1981. After a fall in Buy-Out activity in the late 1990’s transactions have recently increased with prominent examples in 2003 including the €bn 1.05 takeover of BertelsmannSpringer, the science and business media publishing unit of Bertelsmann, by UK financial sponsors Cinven and Candover and the €bn 5.7 takeover of Seat PagineGialle by a consortium of BC Partners, CVC Capital Partners, Investitori Associati, and Permira, Europe’s biggest Buy-Out in 2003. Of particular interest to both the academic and financial communities, is the aspect of their financing structure. Why are LBOs financed with so much debt? How are the complicated financing structures [...]