illegal buyoutsillegal · pdf fileprincipi di finanza aziendale 4/ed - richard a. brealey,...

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Principi di finanza aziendale 4/ed - Richard A. Brealey, Stewart C. Myers, Sandro Sandri Copyright © 2003 - The McGraw-Hill Companies, srl

ILLEGAL BUYOUTSILLEGAL BUYOUTS

Illegal Buyouts Illegal Buyouts –– October 2007October 2007

DouglasDouglas CummingCummingYork University

Schulich School of [email protected]

Simona ZambelliSimona ZambelliUniversity of Bologna

Department of [email protected]

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This paper investigates the effects of buyout regulationseffects of buyout regulations in Italy. It contributes to the literature on PE financing, by empirically examining thefrequencyfrequency, structurestructure and motivationsmotivations underlying leveraged buyouts in Italy with a new detailed hand-collected dataset.

IntroductionMotivationPrior studies & new contributionResearch questions Hypothesis

Data and Methodology

Results & DiscussionDescriptive Statistics & Multivariate Analysis

Conclusions

OutlineOutline


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MotivationMotivation

To prohibit or not to prohibit LBOs?To prohibit or not to prohibit LBOs?

Introduction Data Introduction Data Results ConclusionResults Conclusionss

Growing concernGrowing concern

A growing concern in media around the world is that private equity, and buyouts

in particular, should be heavily should be heavily regulatedregulated.

Buyout debateBuyout debate

• LBOs should be prohibitedprohibited (NY Times 2006)• PE funds need regulation (Economist 2007)• LBOs are illegal (Italian Supreme Court - 2000)

AssetAsset--strippersstrippersPE funds as asset-strippers -sacking people and selling off property, having used too much debt to finance their deals (BBC News, June 2007)

LocustsLocustsPE firms that finance Buyouts are defined as‘locusts’ (International HeraldTribune, November 2005)

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SideSide--Effects of LBOsEffects of LBOsLBOs involve the acquisition of the equity capital of a target firm by another company (newco), realized by using a large amount of debt relative to the asset value of the acquired company. In an LBO deal the debt financing is obtained under the expectation that it will be repaid by the target. As a result, the target pays the economic priceeconomic price of its own acquisition. LBOs are often accused accused of involving:

Conflict of interestsConflict of interests (between managers and target’s stakeholders)Lack of full disclosureLack of full disclosure & Private knowledge advantageIndirect Indirect and fraudulent breach of the Financial AssistanceFinancial Assistance Prohibition

weakening the target’s assets to the detriment of target’s creditors and its stakeholdersA weakening A weakening of the target firmtarget firm’’s s assets and its workforceworkforce

Many Countries introduced restrictions on LBOsrestrictions on LBOs or experienced periods of periods of LBO LBO prohibitionsprohibitions, as has occurred in Italy.

It is then instructiveinstructive to investigate the effects of a prohibition on LBOseffects of a prohibition on LBOs (or a restrictive regulations versus a favorable regulation on LBOs.)


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Selected related studies


Empirical studiesEmpirical studies• Buyout PerformanceBuyout PerformanceCumming, Siegel and Wright (2007 JCF), Nikoskelainen –Wright (2007 JCF), Cao-Lerner (2006 NBER), Lerner – Schoar (2007 WP), Betzer (2006 KC), Gilson –Schizer (2003 HLR) etc.

• Cross Countries differencesCross Countries differences, in terms of the impact of law and institutional impact of law and institutional settings on PE market and VC behavior,settings on PE market and VC behavior, in the spirit of La Porta et al. (1997-98):Cumming, Fleming and Schwienbacher (2006 JCF), Bottazzi-Da Rin, Hellman (2006 WP); Lerner and Schoar (2005 QJE), Kaplan, Martel, Stromberg (2006 WP), Georgen, Martynova, Renneboog (2005 ORES), etc.

Reviews of Buyout RegulationsReviews of Buyout Regulations and other corporate governancecorporate governance regulationsFerran (2007 WP); Renneboog (2007), Enriques (EBOLR 2002); Holmstrom-Kaplan (2001 JEP), etc.

However, there has been less empirical attentionless empirical attention on the financialfinancial implications of such implications of such regulationsregulations (for related work Goergen et al., 2005, Goergen and Renneboog, 2003; Renneboog et al., 2007; Wright et al. 1992, 1996, 2001, 2006, 2007).

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Our contributionPrior empirical research did not examine the impact of a prohibiting and uncertain regulation on buyout transactions. Prior research did not not consideredconsidered the effects of:

Specific prohibitionsSpecific prohibitions of buyouts;;Legislative changesLegislative changes on the discipline of LBO transactions.

Our paper attempts to fill this gapfill this gap, by examining the impact of a change in LBO regulation on the frequencyfrequency, structurestructure and motivationmotivation underlying LBOs, including the impact on the governance of target firms.

We show that prohibiting LBOs did not excludeprohibiting LBOs did not exclude them: It only reduced their frequency and inhibited their efficient structure, to the detriment of the target’s stakeholders.

In time with the current media attention on regulation of PE markets


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Focus

ItalianItalian buyout market, whose transactions were previously prohibited, and only recently have been legalized.

It offers a unique exampleunique example in order to better understand the current international debate on the admissibility of buyouts.


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NO REGULATION UNCERTAINTY- INTENSE DEBATE ON THE

LEGALITY OF LBOs

1992

Farmitalia Case

Forward Merger LBO

LBO WILL BE LEGAL

1999

Civil Court Legal

Criminal Court

Illegal (against 2357 )

PepperlandReverse Merger LBO

Civil Court Illegal

(against 2357 ter)

1995

Courgne’ Spa Case LBO

No merger

Civil Court Illegal

(against 2358)

2000

D’Andria Case

Bankruptcy Case –

confused for LBO

Supreme Court

Illegal (against 2358 ter)

Oct 2001

DELEGATION LAW 366/2001

PROMISE OF A NEW CORPORATE GOV.

REFORM

CORP. GOV. REFORM

Jan 2003

EFFECTIVE DATE

Jan 2004

Leg. Decree 6/2003

NEW

CORPORATE GOV.

REFORM

LBO are LEGAL

Subject to a set Of regulatory restrictions

Problem solved only

for Forward

Merger LBO

Regulation - Made in ItalyDebateDebate--ProhibitionProhibition AnnouncementAnnouncement New New LawLawDEBATE DEBATE ANNOUNCEMENT NEW LAWANNOUNCEMENT NEW LAW

LegalizedLegalizedLBOsLBOs

The Parliament announces theannounces theintentionintention to change the corporateGovernance legal setting and tooverrule the Supreme Court’s overrule the Supreme Court’s decisiondecision

Law 366/2001Law 366/2001

Leg. Leg. DecrreeDecrree 6/20036/2003

Over the last decade the legitimacylegitimacy of LBOs in Italy was strongly debatedstrongly debated among Scholars and Courts (since often considered an indirect -fraudulent breach of the financial assistancefinancial assistanceprohibition in case of acquisition by a companyof its own shares). Several Courts declared LBOs illegal and invalidated them. The debateintensified in Feb. 2000, when the Supreme Supreme CourtCourt deemed LBOsLBOs illegalillegal in Italy and prohibited prohibited them (5503/ Feb. 2000)


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Research Questions

How did prohibitionprohibition of buyouts, and the subsequent change in regulationchange in regulation, affect:

Frequency of buyoutsFrequency of buyouts, relative to other PE transactions (expansion and mezzanine financing)?

Structure of buyoutsStructure of buyouts?

Due diligenceDue diligence of PE investors involved in buyouts?


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3 Time periods

Uncertain legitimacy/Prohibition

Italian Supreme Court: (N. 5503/Feb 2000)

LBOs are illegal

Parliament announcesintention to overrule

Supreme Court decision(Law 366/October 2001)

LBOs will become legal

The New Corporate Governance Regulation

became effective(Leg. Dec. 6/2003 effective Jan 2004)

LBOs are legal


DARK PERIOD HOPE PERIOD DARK PERIOD HOPE PERIOD SUN PERIOD SUN PERIOD

Up to Sept 2001(starting from Jan. 99

in our data)

Oct. 2001Dec. 2003

Jan 2004(up to July 2006

in our data)

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Hypotheses


H1: Frequency of Buyout transactions, relative to other PE transactions

H2: Involvement of PE funds (in terms of invested amount and ownership)

H3: Control rights obtained by PE funds (in terms of right to replace the CEO and to have a majority board control)

H4: Due diligence focused on different criteria, given the different legal and transaction risk

DARK PERIOD HOPE PERIOD DARK PERIOD HOPE PERIOD SUN PERIOD SUN PERIOD

Frequency

Structure

Motivation

Uncertain legitimacy/Prohibition

Italian Supreme Court: (N. 5503/Feb 2000)

LBOs are illegal

Parliament announcesintention to overrule

Supreme Court decision(Law 366/October 2001)

LBOs will become legal

The New Corporate Governance Regulation

became effective(Leg. Dec. 6/2003 effective Jan 2004)

LBOs are legal

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OutlineOutline




Conclusions


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Principi di finanza aziendale 4/ed - Richard A. Brealey, Stewart C. Myers, Sandro Sandri Copyright © 2003 - The McGraw-Hill Companies, srlIntroduction Data Introduction Data Results ConclusionResults Conclusionss

Hand-Collected DataNew handNew hand--collected datasetcollected dataset

In the absence of public information on Italian buyout deal structure, we adopted a sequential mixed-mode survey approachsurvey approach (DeLeeuw, 2005; Dillman et al., 2004), which allowed us to collect a unique datasetunique dataset on the structure and organization of buyout transactions in Italy. Our dataset includes detailed informationdetailed information on:

Governance Governance of target firms (for example: ownership and board seats held by each investor)Specific contractual provisionSpecific contractual provision used by PE funds (for example: right to replace the CEO)Due diligence processDue diligence process (in terms of relevance of different selection criteria adopted by an investor)

We also collected further informationfurther information from different sources (Datastream, Borsa Italiana, AIFI, Fund website) in order to consider relevant control control variables, variables, with reference to: market conditions, investor characteristics, industry market to book values….

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Dataset162 162 investeeinvestee firmsfirms, acquired during the period of 1999-2006 (first semester) by 27 investors active in the PE sector. The PEdeals can be divided into two parts:

a) BuyoutsBuyouts transactions in 103 103 target firms;b) Other PEOther PE transactions (expansion financing) in 59 59

target firms.

Among the 27 PE investors27 PE investors, 21 declared to be active in the buyout sector.


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Response rate


Trust was the major constraint for the effectiveness of our survey project, since it involved confidential information about the specific private equity deal.

Considering the number of the investor active in the PE sector as a whole, we obtained a response rate of 47%47% (27 over 57 active investors)

Focusing only on the buyout sector, we obtained a response rate of 84%84%(21 over 25 active investors)

Both response rates compare favorablycompare favorably with previous survey in finance (for example: Brau, Fawcett (2006 JF) obtained a response rate of 19%; and Graham, Harvey (JFE 2001) obtained a response rate of 9%).

Our sample is representativerepresentative of population (in terms of regional-sector and time distribution).

A part from a few exceptions, the comparison tests with the PEM database indicate no no statistically significant differencessignificant differences between our data relative to the PEM data (Table 1).

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OutlineOutline




Conclusions


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Main Results: Impact


In line with our expectations, the regulatory changeregulatory change (period of legality)affected affected not only the frequency but also the structure of buyout transactions.

FREQUENCY: FREQUENCY: More Buyout transactionsMore Buyout transactionsPE funds are more likely to undertake buyoutsmore likely to undertake buyouts in the Sun period (the descriptive stat. shows that 73% 73% of the transactions were buyouts in the Sun vs 55%55% in the Dark period). (The probability of undertaking an LBO increased by 13 13 –– 3838 %)

STRUCTURESTRUCTUREMore involvementMore involvement, , by PE funds. After the legal change PE funds tend to:Invest more capital Invest more capital relative to the pre-money valuation of the firm, (by 1919--2727%);HaveHave a greater ownershipgreater ownership %% in the buyouts after the legislative change (by 2525%) Invest moremore often with convertible debtconvertible debt (by 44--99%)

More control rightsMore control rights, , by PE funds. They are moremore likely to:have the right to replace the CEOright to replace the CEO (by 1818--4141%) take a majority positionmajority position on the boardboard of directors (by 2525--3737%).

MOTIVATION: MOTIVATION: Different motivation and Due Diligence (DD) FocusDifferent motivation and Due Diligence (DD) FocusOver the sun period, the DD is focused on more more crucial crucial investment criteriainvestment criteria

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Different Due Diligence focusOver the sun period, the DD seems to be more focused on the on the efficient efficient structurestructure of the of the investmentinvestment and quality of the and quality of the business planbusiness plan

In the sun period (legality):

• LBOs are 19% more intensively screened for the efficient structureefficient structure of the of the investmentinvestment (amount of capital required, ownership percentages obtained in the target firm, time to reach the break even point, strategic fit with the other firms in the fund's portfolio, IRR).

• LBOs are 19% more intensively screenedmore intensively screened for the quality of the businessquality of the businessplanplan in reference to market conditions.

In the dark period (Illegality):

• LBOs were 15% more intensively screenedmore intensively screened for the fit (‘agreeablenessagreeableness’)with the target firm management, and the target firm objectives. This is explained by the high transaction risk. PE funds were focused on the agreeableness with the target, so that the transaction would not be contested and deemed illegal.


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Principi di finanza aziendale 4/ed - Richard A. Brealey, Stewart C. Myers, Sandro Sandri Copyright © 2003 - The McGraw-Hill Companies, srlIntroduction Data Introduction Data Results ConclusionResults Conclusionss

Frequency

"Dark" LBO Illegal(January 1999 -October 2001)

"Hope" LBO will beLegal

(November 2001 -December 2003)

"Sun" LBO Legal (January 2004 -

July 2006)

0,54 0,55

0,73

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

Number of Buyouts / Total N. of PE deals

(Buyouts and other PE deals)

Figure 1. Impact of Regulation on Buyouts versus Other PE

% Buyout (within each period)

Difference Tests between Dark and Sun

(difference is stat. sign)

Mean

-1.717*

There were significantly

more LBOs in the

Sun period

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Principi di finanza aziendale 4/ed - Richard A. Brealey, Stewart C. Myers, Sandro Sandri Copyright © 2003 - The McGraw-Hill Companies, srlIntroduction Data Introduction Data Model 1Model 1--4 Conclusion4 Conclusionss

"Dark" LBO Illegal(January 1999 -October 2001)

"Hope" LBO will beLegal

(November 2001 -December 2003)

"Sun" LBO Legal (January 2004 - July

2006)

0,17

0,24

0,27

0

0,05

0,1

0,15

0,2

0,25

0,3

Investor Investment Values/ Pre-Money Valuation

Figure 2. Impact of Buyout Regulation on Investor Capital / Valutation

AverageMedian

Invested capital

Difference Tests between Dark and Sun

(difference is stat. sign)

Median

p <= 0.000***

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MultivariateMultivariate AnalysisAnalysis

1. ProbabilityProbability of undertaking a Buyout Buyout 2. InvestmentInvestment / Pre-Money Valuation3. OwnershipOwnership %4. Probability of using Convertible Convertible DebtDebt5. Probability of including the right to ReplaceReplace CEOCEO6. Probability of having MajorityMajority position on the BoardBoard7. ReasonsReasons for Investment

Control variables: legal settings (dark, hope, sun)Market conditionsInvestment characteristicsInvestee characteristicsInvestors characteristics

Introduction Data Introduction Data Cont. Var. ConclusionCont. Var. Conclusionss

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LHS: Buyout DummyLHS: Buyout Dummy LHS: Investment / PreLHS: Investment / Pre--Money ValuationMoney ValuationModel 1: Model 1: LogitLogit Model 2: Model 2: LogitLogit Model 3: Model 3: TobitTobit Model 4: Model 4: TobitTobit

Marginal Effect t-statistic Marginal Effect t-statistic Marginal

Effect t-statistic Marginal Effect t-statistic

Legal ConditionsLegal Conditions

Dark Period 0.013 0.130 0.212 2.109** 0.078 0.747 0.145 1.266

Hope Period -0.043 -0.559 0.015 0.145 0.147 1.585 0.2200.220 2.151**2.151**

Sun Period 0.1380.138 1.814*1.814* 0.3840.384 3.034***3.034*** 0.1850.185 2.123**2.123** 0.2680.268 2.700***2.700***

Market ConditionsMarket Conditions

3-Month Stock Market Return -0.309 -0.848 0.164 0.286 -0.115 -0.467 -0.120 -0.345

12-Month Stock Market Return -0.728 2.013** -0.122 -0.475

Bubble Dummy Variable 0.080 0.627 0.138 1.223

Investment CharacteristicsInvestment Characteristics

Syndication -0.038 -2.101**

Number of Staged Financing Rounds -0.009 -0.166 0.001 0.013

Book Value of the Investment 4.257E-06 0.542

Lead Investor 0.070 1.542 0.039 0.809

Investee CharacteristicsInvestee Characteristics

Industry Market / Book -0.012 -0.612 -0.026 -0.996 0.002 0.145 -3.200E-04 -0.018

Investor CharacteristicsInvestor Characteristics

Fund Age 6.069E-04 0.063 -1.322E-04 -0.064

International Affiliation 0.248 2.715*** -5.745E-03 -0.366

Capital under Management per Investor 2.441E-06 1.535 8.940E-07 1.170 1.127E-07 1.512 1.049E-07 1.292

Bank Subsidiary -0.528 5.323*** -0.073 -1.235

Model DiagnosticsModel Diagnostics

Number of Observations 162162 162162 103103 103103

Chi-Square 20.152*** 71.572***

Pseudo R2

Decomp Based Fit Measure for Tobit 0.095 0.337 0.052 0.082

Loglikehood -96.163 -70.453 -7.550 -3.655

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LHS: Log (Ownership % / (1 LHS: Log (Ownership % / (1 -- OwnershOwnersh.%)).%)) LHS: Convertible Debt DummyLHS: Convertible Debt Dummy

Model 5: OLSModel 5: OLS Model 6: OLSModel 6: OLS Model 7: Model 7: LogitLogit Model 8: Model 8: LogitLogit

Coefficient t-statistic Coefficient t-statistic Marginal Effect t-statistic Marginal Effect t-statistic

Constant -1.900 -3.627*** -1.474 -3.462*** -0.174 1.215 -0.046 -2.118**


Dark Period

Hope Period 1.5431.543 3.607***3.607*** 1.2811.281 2.867***2.867***

Sun Period 1.6301.630 3.875***3.875*** 1.0601.060 2.986***2.986*** 0.0900.090 1.955*1.955* 0.0480.048 1.655*1.655*


3-Month Stock Market Return -1.233 -0.572 -2.209 -0.946 0.052 0.286 -0.004 -0.075

12-Month Stock Market Return 0.325 0.206

Bubble Dummy Variable -0.403 -0.668


Syndication -0.228 -2.608***

Number of Staged Financing Rounds -0.354 -1.543 -0.452 -2.207** 0.051 1.315 0.018 2.541**

Book Value of the Investment 1.888E-05 5.099*** -6.531E-07 -0.927

Lead Investor 1.365 5.360*** 1.636 7.905*** 0.015 0.571


Industry Market / Book -0.125 -1.605 -0.023 -0.345 -0.014 -0.695 -3.492E-03 -0.553


Fund Age 5.231E-03 0.436 -1.458E-03 -1.338

International Affiliation -0.118 -2.391**

Capital under Management per Investor 1.692E-06 2.663*** 8.068E-07 1.798* -8.816E-10 -0.010 1.350E-08 0.681

Bank Subsidiary -0.530 -1.816*



F-Statistic (Chi-Square for Logit) 10.25*** 9.77*** 12.157* 16.608*

Adjusted R2 (Pseudo R2) 0.388 0.546 0.216 0.295

Loglikehood -168.029 -148.720 -22.045 -19.819

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LHS: Replace CEO DummyLHS: Replace CEO Dummy LHS: Majority Board DummyLHS: Majority Board DummyModel 9: Model 9: LogitLogit Model 10: Model 10: LogitLogit Model 11: Model 11: LogitLogit Model 12: Model 12: LogitLogit

Marginal Effect t-statistic Marginal Effect t-statistic Marginal Effect t-statistic Marginal Effect t-statistic

Constant -0.398 1.519 -0.239 -0.752 -0.092 -0.460 -0.045 -0.410


Dark Period

Hope Period 0.3240.324 2.515**2.515** 0.3190.319 1.667*1.667* 0.095 0.837 0.100 1.340

Sun Period 0.4020.402 2.849***2.849*** 0.175 0.922 0.3720.372 2.733***2.733*** 0.2490.249 2.613***2.613***


3-Month Stock Market Return 0.408 0.712 -0.043 -0.048 -0.568 1.083 -0.546 -1.510

12-Month Stock Market Return 0.579 0.785 0.198 0.767

Bubble Dummy Variable 0.084 1.154


Syndication -0.024 -0.442

Number of Staged Financing Rounds -0.034 -0.260 -0.032 -0.234 0.036 0.316 0.002 0.034

Book Value of the Investment 4.002E-06 0.792 -3.855E-06 -1.218

Lead Investor 0.218 2.016** 0.216 1.666* -0.031 -0.338 -0.031 -0.606


Industry Market / Book 0.015 0.369 0.005 0.116 -0.011 -0.381 -1.243E-02 -0.732


Fund Age 1.182E-02 1.040 4.478E-03 1.033

International Affiliation 0.056 1.413 -4.036E-02 -1.964**

Capital under Management per Investor 5.189E-07 1.932* 3.335E-07 0.856 8.245E-07 1.587 1.552E-06 1.376

Bank Subsidiary -0.561 4.087*** -0.032 -0.470



Chi-Square 16.741** 40.001*** 20.146*** 31.175***

Pseudo R2 0.122 0.291 0.162 0.251

Loglikehood -60.434 -48.804 -52.064 -46.550

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Internal Criteria Relative to Internal Criteria Relative to

Firm ManagementFirm ManagementInternal Criteria Relative to the Internal Criteria Relative to the

FirmFirmCriteria Relative to the FirmCriteria Relative to the Firm’’s s

Business PlanBusiness PlanExternal Criteria Relative to the External Criteria Relative to the

MarketMarketCriteria Relative to the Criteria Relative to the

InvestmentInvestmentModel 13: OLSModel 13: OLS Model 14: OLSModel 14: OLS Model 15: OLSModel 15: OLS Model 16: OLSModel 16: OLS Model 17: OLSModel 17: OLS

CoefficientCoefficient tt--statisticstatistic CoefficientCoefficient tt--statisticstatistic CoefficientCoefficient tt--statisticstatistic CoefficientCoefficient tt--statisticstatistic CoefficientCoefficient tt--statisticstatistic

Constant 5.114 11.289*** 4.301 16.807*** 2.720 5.939*** 3.054 9.594*** 3.031 8.976***


Dark Period

Hope Period --0.7530.753 --2.078**2.078** -0.368 -1.302 0.8510.851 2.229**2.229** 0.149 0.513 0.7120.712 2.250**2.250**

Sun Period -0.332 -1.087 --0.4260.426 --2.299**2.299** 0.9510.951 2.390**2.390** 0.4300.430 1.923*1.923* 0.9380.938 3.416***3.416***

Mkt. ConditionsMkt. Conditions

3-Month Stock Market Return 0.861 0.592 -1.067 -0.926 -1.003 -0.716 -1.066 -0.913 -2.646 -1.928*

12-Month Stock Market Return -0.864 -0.799 0.465 0.519 0.570 0.562 1.349 1.493 1.261 1.492

Bubble Dummy -0.803 -1.512 -0.407 -1.128 0.803 1.769* -0.328 -0.957 0.229 0.561

Investment Investment CharacteristicsCharacteristics

Syndication -0.010 -0.157 -0.104 -2.219** -0.031 -0.632 -0.006 -0.110 -0.041 -0.670

# of Staged Financing Rounds -0.096 -0.315 -0.197 -1.457 -0.017 -0.107 -0.207 -1.218 -0.497 -3.252***

Book Value of the Investment 3.311E-06 0.663 9.540E-06 2.686*** -7.671E-08 -0.031 6.609E-06 2.480** 1.212E-05 3.356***

Lead Investor -0.319 -1.540 -0.067 -0.409 0.200 1.029 0.195 1.158 0.410 1.955*

Investee Investee CharacteristicsCharacteristics

Industry Market / Book -0.094 -1.313 0.062 1.063 0.020 0.338 0.220 3.636*** -1.270E-02 -0.190

Investor Investor CharacteristicsCharacteristics

Fund Age -0.029 -3.928*** -0.032 -5.015*** 5.309E-04 0.115 -0.024 -1.959* -2.868E-02 -2.705***

International Affiliation 0.152 4.352*** 0.167 5.479*** -0.051 -1.425 -0.033 -0.999 3.590E-01 5.469***

Capital under Management per

Investor-8.266E-07 -1.455 -7.132E-07 -1.598 7.016E-07 1.783* 8.080E-07 2.769*** -8.324E-07 -3.352***

Bank Subsidiary -0.070 -0.289 0.072 0.359 0.460 2.015** 0.453 2.448** -1.884 -5.331***

Adjusted R2Adjusted R2 0.119 0.194 0.037 0.200 0.473

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OutlineOutline




Conclusions


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Conclusions

Buyout frequencyBuyout frequency

Involvement of PE fundsInvolvement of PE fundsPE funds are more likely to be more involvedmore involved in terms of: invested capital, ownership.Different deal structureDifferent deal structure (PE investors are more willing to use convertible debts and to have stronger control rights)

Different motivationDifferent motivation for undertaking buyouts In the dark period LBOs were more intensively screened for the fit with the target firm management. On the contrary, after the legal change the due diligence was more focused on other crucial factors: efficient structure of the investment, BP quality, IRR, deal efficient structure of the investment, BP quality, IRR, deal structurestructure…


What was the impact of the change in LBO regulation?What was the impact of the change in LBO regulation?

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RenderingRendering LBOs illegal did not exclude themLBOs illegal did not exclude them, but inhibited inhibited their efficient efficient structurestructure. They were simply structured in different ways, in terms of less: ownership, involvement, and control rights. It simply precluded the PE precluded the PE involvementinvolvement against the interests of target’s stakeholders. Policy makers obtained exactly the opposite of what they wanted!

Prohibition:Does not eliminate LBOsDoes not eliminate LBOs (Buyouts were carried out anyway, despite the prohibition), but rather:Impedes their efficient structureImpedes their efficient structure & governance (in terms of less capital involvement, less ownership and less control rights)DistortsDistorts the due diligencedue diligence process and decisiondecision--makingmaking (with PE funds more focusedmore focused on less important factors -agreeableness with target firmagreeableness with target firmmanagement - in order to minimize the transaction risk, so that the transaction would not be contested and deemed illegal.


To prohibit or not to prohibit LBOs?To prohibit or not to prohibit LBOs?

Conclusions

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