Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

The Stormy History of Leveraged Buyouts

admin by admin
August 28, 2013
in Uncategorized
0
0
SHARES
199
VIEWS
Share on FacebookShare on Twitter

by Hamid Mehran and Stavros Peristiani – Liberty Street Economics, Federal Reserve Bank of New York

In global finance, leveraged buyouts (LBOs) are an important tool for restructuring corporations. LBO activities have had a turbulent history in the United States over the last three decades—from the junk-bond-financed wave of the 1980s to the most recent boom-and-bust episode of 2006-07 caused by the collapse of asset-backed securitization.

The stylized view is that buyouts are a tool for extracting value through reorganization by streamlining low-growth public firms that have stable cash flows. This post shows that younger public firms experiencing weak financial interest from security analysts and low investor recognition are also more likely to go private. In many cases, founders and managers of these firms with insufficient analyst following had the opportunity to ascertain firsthand the costs and benefits of both private and public ownership, and they decided to go private again.

A Brief History of U.S. Leveraged Buyouts

The dramatic surge in LBO activities in the 1980s was made possible by the emergence of the high-yield bond market as the dominant source of financing for speculative-grade debt (see the chart below). While default was very rare among LBO firms in the early 1980s, by the end of the decade, excess speculation and overpriced deals became quite pervasive. Following several high-profile corporate bankruptcies, the junk bond market imploded in 1989. After the collapse of the junk bond market, interest in LBOs cooled off considerably in the 1990s. Facing new, more stringent risk-weighted capital requirement rules and more intense regulatory scrutiny, commercial banks also contributed to the declining interest in buyouts by refusing to finance deals.

Ch1_Boom-and-Bust-Cycles

The resurgence in the volume of LBO deals in the mid-2000s was spurred by the growing pool of private equity firms that raised capital from large institutional investors. The emergence of asset-backed securitization also radically changed the funding of LBOs as the buyout market transitioned from high-yield bond financing to financing conducted largely through syndicated leveraged loans. At the peak of the LBO market in 2007, collateralized loan obligation securities provided close to two-thirds of the funding for the institutional loan issuance.

Despite the collapse of the asset securitization market, buyout activities have slowly reemerged over the last few years. In many ways, the LBO market has performed considerably better in the years following the recent financial crisis than it did in the wake of previous downturns. For example, the collapse of the junk bond market in the late 1980s was more onerous for LBO sponsors that struggled to find alternative sources of financing for many years.

The Profile of LBO Targets

LBOs are a mechanism for disciplining inefficient corporate organizations and realigning the interests of stockholders and management. Agency problems—that is, conflicts of interest between stockholders and management—are more prevalent in low-growth stable firms with substantial free cash flows. Managers of these firms are more likely to squander these cash flows on unprofitable investment projects. LBOs mitigate these agency conflicts by enabling managers to own a larger stake in the firm and enhance managerial discipline through the high debt service imposed on the firms. The downside of greater leverage, however, is that it also raises default risks for debt-laden buyout targets that become more vulnerable to economic downturns and industry-specific shocks. The importance of these firm features is seen in the table below, which shows that buyout targets generated significantly greater free cash flow and had lower investment spending than did their non-LBO peers over the last three decades.

Table_Buyout-firms

Starting in the 1990s, the corporate sector experienced more proactive monitoring by institutional investors. Managerial compensation was increasingly tied to performance as a significant portion of a chief executive officer’s pay was awarded in stock. All these improvements in corporate governance should have lessened the need for buyout discipline. Thus, the resurgence of LBOs in the 2000s suggests that these transactions might also be motivated by several other factors—for example, the desire to avoid regulatory costs and shareholder scrutiny, or the use of debt financing to lower tax obligations.

In a recent paper in the New York Fed’s Staff Reports series, we document that many of the companies electing to go private did so only about five years after they went public for the first time. We find that the desire among these relatively young firms to go private is attributable to their inability to attract sufficient financial visibility, measured by analyst coverage (see the chart below). One of the potential benefits of going public is that these firms would be more closely monitored by security analysts that collect and disseminate valuable information to investors.

Ch2_Number-of-Security

Financial visibility is very important for younger, less known public companies. Greater financial visibility can enhance stock liquidity, boost firm value, and lower financing costs. Firms that go public strive to reach an optimal scale of financial recognition to compensate for the costs of public ownership. Our staff report shows that firms that do not fully realize the benefits of their public listing are more inclined to go private.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

source: U.S. Leveraged Buyouts: The Importance of Financial Visibility


About the Authors

Mehran_hamid

Hamid Mehran is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Peristiani_stavros
Stavros Peristiani is an assistant vice president in the Research and Statistics Group.

Previous Post

Pluralist Economics – The Verein Strikes Back

Next Post

Trends In Finding and Having A Job

Related Posts

Bitcoin Flirts With $24K, How High Will It Go?
Economics

Bitcoin Flirts With $24K, How High Will It Go?

by John Wanguba
February 3, 2023
Venezuela's PDVSA Toughens Oil Prepayment Terms
Business

Venezuela’s PDVSA Toughens Oil Prepayment Terms

by John Wanguba
February 2, 2023
German Economy Unexpectedly Contracts In Q4, Renewing Recession Fears
Economics

German Economy Unexpectedly Contracts In Q4, Renewing Recession Fears

by John Wanguba
February 2, 2023
Judge Dismisses Proposed Class-Action Suit Claiming Coinbase Securities Sales
Business

Judge Dismisses Proposed Class-Action Suit Claiming Coinbase Securities Sales

by John Wanguba
February 2, 2023
Aesop Targeted In $2bn Bidding War Between French Groups
Business

Aesop Targeted In $2bn Bidding War Between French Groups

by John Wanguba
February 1, 2023
Next Post

Trends In Finding and Having A Job

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking banks Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe finance FTX inflation investment market analysis markets Metaverse mining NFT nonfungible tokens oil market price analysis recession regulation Russia technology Tesla the UK the US Twitter

Archives

  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Bitcoin Flirts With $24K, How High Will It Go?
  • Venezuela’s PDVSA Toughens Oil Prepayment Terms
  • German Economy Unexpectedly Contracts In Q4, Renewing Recession Fears

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish