Examining Gains in Operational Efficiency in Public-to-Private and Private-to-Private Transactions

• Main Author: Quazzo, Dante
• Format: Others
• Published: Scholarship @ Claremont 2015
• Subjects: operational performance private equity leveraged transactions; Corporate Finance; Econometrics; Finance; Finance and Financial Management
• Online Access: http://scholarship.claremont.edu/cmc_theses/1000; http://scholarship.claremont.edu/cgi/viewcontent.cgi?article=2088&context=cmc_theses

Using private firm financial data, I compare operational improvements in public-to-private and private-to-private leveraged transactions in Western Europe between 2003 and 2010. Results are consistent with the recent literature and find operational gains to be significantly smaller then when buyouts were originally analyzed by Jensen (1989) and Kaplan (1989). Public firms experience an increase in raw EBITDA margin of 7.2 percentage points three years post-buyout, while a doubling of firm size yields an increase in EBITDA margin of 4.6 percentage points in year three post-buyout. Using industry-adjusted data, prior corporate form is positive and significant in year two post-buyout. Contrary to prior literature’s expectations, governance state does not impact increases in net profit margin or return on assets. My analysis offers support for the free cash flow theory, as the positive and significant effect of a public structure on EBITDA margin suggests that public firms have greater growth potential for private equity investors and more agency costs than their private counterparts.