Does LBO really provide value? An empirical analysis of post-LBO performance.

4 1. INTRODUCTION AND OBJECTIVES OF THE PAPER. The leveraged buyout (LBO) has always been considered a fascinating transaction by finance students and scholars, so interesting to attract a lot of attention even from journalists, writers and movie makers. The focus is thus often captured by glamorous aspects such as the last jumbo deal or the new kingmaker on the street. Instead academic explanations often concentrate their focus on the pre-deal determinants of these transactions and on the financial engineering part of the structuring work. These aspects are surely important, but they do not unhide the real levers of value creation in buyouts and they often do not show the empirical findings on the performances of acquired firms. There is not an actual lack of research on this topic, but we can say that the results of the studies do not agree on the consequences of buyouts and thus they are neglected by the main finance textbooks. The latter tend to consider an investment banking approach that is concentrated on the structuring phase, while we would appreciate a deeper analysis of the post-deal phases. In other words, the usual examples on the Internal Rate of Return enhancement by LBOs has the caveat of showing the returns obtained by shareholders too easy to achieve and the whole transaction as even “magic”. Instead the returns are necessarily the consequences of the actions of the management teams leading the firms during the post-deal phases. The corporate strategies have an impact on the financial performances and ultimately on the returns delivered by buyout funds. As a direct consequence of the above observations, our approach is going to be focused on the fundamentals of value. Therefore we are going to investigate the value creation in leveraged buyouts with a particular attention to the indicators of accounting improvements for the years after the acquisitions. The main literature on the topic is going to be described in chapter 2 together with the adopted model. The scholars usually agree on the improvements inspired by leveraged transactions to the firms, but they often find different explanations. In fact, it is unclear whether the performance growth and efficiencies obtained are caused by the debt burden or by the managerial incentives given to the new professionals and which relevance has to be given to these measures. Researchers do not agree also on the entity of benefits enjoyed by the financial statements of firms and on their lasting magnitude. We are going to try to give an answer to these doubts through an analysis of a sample of 50 companies undergoing leveraged buyouts. This panel is going to be described in chapter 3 together with the criteria employed to look for the data. Our sample has two main drawbacks: the small size caused by the scarce information on the