Executive Summary
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Listed firms go private through a leveraged buyout (LBO)—for example, a management buyout or an institutional buyout).
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Reasons for going private are the value of the tax shield, increased incentives for management through equity ownership, to reduce cash flows, to avoid the direct and indirect costs of maintaining a listing, or as an anti-takeover device.
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At announcement of the LBO of a listed firm, the premium (the offer price relative to the pre-buyout share price) amounts to about 40% and abnormal returns to about 25%.
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Good candidates for LBOs have stable cash flows, low and predictable capital investment needs, a liquid balance sheet with collateralizable assets, an established market position, and are in a recession-proof industry.
Introduction
When a listed company is acquired and subsequently delisted, the transaction is referred to as a public-to-private or going-private transaction. As most such transactions are financed by substantial borrowing, which is used to repurchase most of the outstanding equity, they are called leveraged buyouts (LBOs). An overview of the different types of LBO is given in Table 1. Four categories are generally recognized: management buyouts (MBOs), management buyins (MBIs), buyin management buyouts (BIMBOs), and institutional buyouts (IBOs).
Table 1. Summary definitions of types of public-to-private transaction
| Term | Definition |
| LBO | Leveraged buyout. Acquisition in which a nonstrategic bidder acquires a listed or non-listed company utilizing funds containing a proportion of debt that is substantially above the industry average. If the acquired company is listed, it is subsequently delisted (in a going-private or public-to-private transaction) |
| MBO | Management buyout. An LBO in which the target firm’s management bids for control of the firm, often supported by a third-party private equity investor |
| MBI | Management buyin. An LBO in which an outside management team (often backed by a third-party private equity investor) acquires a company and replaces the incumbent management team |
| BIMBO | Buyin management buyout. An LBO in which the bidding team comprises members of the incumbent management team and externally hired managers, often alongside a third-party private equity investor |
| IBO | Institutional buyin. An LBO in which an institutional investor or private equity house acquires a company. Incumbent management can be retained and may be rewarded with equity participation |
| Reverse LBO | A transaction in which a firm that was previously taken private reobtains public status through a secondary initial public offering (SIPO) |
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