August 28, 2007

Leverage and Pricing in Buyouts: An Empirical Analysis

By Prof. Michael S. Weisbach, University of Illinois, on the Harvard Law “Corporate Governance” Blog:

Ulf Axelson, Tim Jenkinson, Per Stromberg, and I have released Leverage and Pricing in Buyouts: An Empirical Analysis, a study of the financings of 153 large buyouts. The Article gathers a sample of large recent buyouts and considers the impact of a number of factors on their pricing and structure. The paper presents our findings with respect to the factors that drive buyout dynamics.

We find, for example, that the availability of leverage seems to be an important determinant of prices in buyouts. In other words, as financial markets have become more lax, historical prices of buyouts have gone up, potentially leading to the boom in buyouts of the last 2 or 3 years. This finding suggests that, given the crash in the bond market last month, there would be fewer buyouts–and those that do occur will be at lower prices than before. All of those predictions are consistent with what we are seeing in financial markets now.

Another finding of interest is that “club” deals occur, if anything, at higher prices than otherwise-similar deals that are sponsored by a single private-equity house. This finding is in contrast to allegations that a reason for “club” deals is to collude on prices.