The period 2005 through mid-2007 saw an explosion of leveraged buyout (LBO) activity that eclipsed even the LBO boom of the 1980s. In 2006 alone, approximately three percent of the U.S. stock market (by market capitalization) was taken private in LBOs (Kaplan and Stromberg (2009)). This form of acquisition dramatically transforms the acquired company’s structure, leaving it with more concentrated ownership, greater financial leverage, few financial reporting requirements, and no
Given the scale of the LBO market, understanding the real and financial consequences of these dramatic changes is important to academics, policy-makers, and tax administrators, as well as to investors in private equity firms undertaking LBOs. Using corporate tax return data to examine a set of 189 LBO firms from 1995-2007, we find that improvements in operating performance are concentrated among firms that performed poorly pre-LBO and that firms do not generally reduce their leverage, even if they generate excess cash flow.
From a researcher’s standpoint, assessing the consequences of LBOs in the U.S. is made difficult by the opacity of LBO firms post-buyout. Having been taken private, LBO firms in the U.S. are not, in general, required to make their financial statements public. Prior analyses of U.S. LBOs have studied the firms for which financial statement information is available, either because the acquired firm has public debt outstanding or because it subsequently goes public again and discloses recent historical financial information at that point. However, because the sample of firms meeting one of these criteria is small and clearly non-random, it is not known whether the conclusions of these studies generalize to LBOs as a whole.
In this paper, we sidestep the lack of published financial statements for most U.S. LBO firms by using federal corporate tax return data to study post-LBO performance and financial structure. Because all U.S. corporations - public or private - are required to file tax returns, our access to confidential tax return data allows us to observe post-LBO income and balance sheet information for a much more comprehensive set of U.S. LBO firms than prior studies. Our sample currently consists of 189 LBO firms during the period 1995-2007 for which we have at least the first two years of tax return data post-LBO. We use these data to address two important questions: Are LBOs associated with improvements in operating performance? And how persistent is the leverage increase associated with an LBO?
