Financial profile of leveraged buy-out targets: some French evidence
Anne-Laure Le Nadant
Purpose – Seeks to investigate whether the financial characteristics of leveraged buy-out (LBO) targets differ from those of firms that have not undergone an LBO before the deal. Specifically, to examine the free cash flows (FCFs), income taxes, capital intensity, business risk, profitability, financial structure and asset characteristics of 175 French LBO targets that are mainly privately held and rather small companies, between 1996 and 2002. Design/methodology/approach – Predictions derive from the FCF and the tax savings hypotheses, and from the criteria used by LBO firms in their acquisition rationale. Tests were conducted of differences between LBO targets and control companies and logit regressions run. Findings – Results show that LBO targets are less indebted, have more liquid (financial) assets, and exhibit higher business risk than their industry counterparts. A distinction between LOBs according to the vendor type shows that independent companies are smaller, more profitable, and have higher tax income levels, whereas former subsidiaries or divisions of groups are less profitable, and have more financial assets than their industry counterparts. Logit regressions suggest that LBOs of smaller independent targets that LBOs of smaller independent targets fit fiscal and succession motives, whereas LBOs of former subsidiaries address management issues. Research limitations/implications – The likelihood of an LBO is related to accounting ratios only. Further research could include other financial or strategic variables in the models. Practical implications – The unexpected risky profile of targets has implications for LBO firms. Originality/value – A new result is the risky profile of LBO targets prior to the deal. This could help to explain the underperformance puzzle after the deal already emphasized on the French market.
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