Paper: Buyouts Aren’t as Bad as You Think

A working paper from Prof. Jarrod Harford and Prof. Adam Kolasinski of the Foster School of Business finds some really interesting things. Portfolio company sales actually create wealth.

In fact, when sponsors sell their companies to a public strategic buyer, the strategic’s stock price jumps and their long term stock price is “indistinguishable” from other acquirers’s. And what about all those special dividends that PE firms supposedly take? The paper finds that portfolio companies with public debt rarely issue special dividends. And those that do occur rarely forecast future distress. Strategic sales are the most common exit, 36%, for a portfolio company, almost a third of the companies are sold to a financial buyer, 10% go IPO and 14% ended up in financial distress (I still haven’t figured out where the rest ended up).

See working paper here.

Secondary buyouts have become very popular of late. But being owned by a PE firm doesn’t mean a sale to a financial buyer is any more likely than an IPO or sale to a strategic, the paper says.  However, secondary buyouts are more likely when the sponsor has owned the portfolio for a long time. The paper finds that “portfolio companies are more likely to stay private, either by exit to a financial buyer or no exit at all, when they are in concentrated industries.”

The working paper looked at 788 U.S. buyouts from 1993 to 2001, valued at $50 million or more, and tracked their exits through 2009.