Results of buyouts in the 1980s and today: A case study of the buyouts of Beatrice (1986) and HCA (2006)

Abstract: This thesis analyzes the leveraged buyouts of the 1980s and of today through three changes to corporate governance that Holmström and Kaplan (2001) saw as a result of an LBO: a resolution of the agency problem, the discipline of debt, and active ownership. By conducting case studies of the Beatrice buyout in 1986 and the HCA buyout in 2006, we will provide practical examples of these three issues, and try to find similarities and differences between the two LBO waves with regards to these three issues. The findings show that the results of LBOs in fact are much the same today as twenty years ago. However, we find some differences: (1) The aim is to align managerial and shareholders’ incentives, but this could be considered a more delicate issue today. Executive compensation has received much attention in the media, whereas a company that is taken private does not receive the same attention. (2) Debt levels are still high, but might have to be looked at more carefully today. The conglomerate structure in the early 1980s made it possible to a greater extent to sell non-core assets to pay down debt. (3) Active ownership is a key result of LBOs. However, we have reason to believe that consortiums of private equity firms will have a harder time deciding among themselves about the future of the portfolio companies, compared to if just one buyout firm purchased the company. We also find that the way in which deals are done today is different as a result of the economic conditions of the respective time period.