LBO Determinants & The Financial Crisis: Evidence from Nordic Public to Private Transactions

Abstract: The determinants of leveraged buyouts (LBOs) have received a lot of attention in past research after the 1980s LBO boom and mid-2000s takeover wave. This thesis aims to examine the effect of the Great Financial Crisis on the explanatory power of LBO determinants, using 62 Nordic public-to-private transactions from the last two decades. Using the crisis year as a structural break, pre-crisis and post-crisis sub-sample regressions are conducted. The study finds that, post-crisis, LBO targets have higher liquidity levels and are relatively undervalued compared to matched controls, confirming the hypotheses and previous literature. Bidders' increased focus on liquidity is intuitive given the stricter credit conditions and the importance of cash-buffers after the financial crash. Value-creation, being the key objective of an LBO, explains why bidders target firms whose managers are deemed to be underperforming by the market. Contradicting traditional theory, post-crisis targets have higher debt levels; the study suggests that this finding can be attributed to the signaling hypothesis, partially supported by higher EBITDA growth rates sustained by LBO targets. Although this study identifies capital raising activities as potential Nordic LBO determinants, it cannot with certainty confirm the economic relationship between pre-transaction debt financing activities and LBO likelihood.