The Causes and Consequences of Leveraged Management Buyouts

Either voluntarily as mergers and selloffs or involuntarily through hostile takeovers, a massive wave of corporate restructuring took place in the United States in the 1980s (Hoskisson & Turk, 199(3). Often consisting of business liquidations in multidivisional companies, it involved major changes in corporate assets along with major changes in corporate strategy. Restructuring, sometimes involving divestiture of assets, also followed leveraged management buyouts (LBOs). In 1987, about one third of U.S. takeover activity was in the form of LBOs (Hall, 1989). The equity value of firms going private had increased from $8.5 billion in 1980-1983 to $42.5 billion in 19841987 (Lehn & Poulsen, 1988, 1989). Although the performance of firms following other types of restructuring has received substantial scholarly attention (e.g., Bradley, Desai, & Kim, 1988; Jensen & Ruback, 1983; Ravenscraft & Scherer, 1987; Weidenbaum & Vogt, 1987), comparatively less attention has been devoted to firm performance following LBOs. Most writing about LBOs is limited to work done by economists (Kaplan, 1988; Muscarella & Vetsuypens, 1989; Smith, 1988). Many of the studies deal with small samples and examine only short-term performance (i.e., 1 or 2 years after the LBO). The causes and consequences of LBOs have not been comprehensively examined by management scholars. LBOs are likely to be messy affairs. Whether managers are motivated to operate the ñrm efficiently or employees are being treated fairly or ethically.