Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 817: Buying to Sell: A Theory of Buyouts

Pehr-Johan Norbäck (), Lars Persson () and Joacim Tåg ()
Additional contact information
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Joacim Tåg: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: Private equity owned firms have more leverage, more intense compensation contracts, and higher productivity than comparable firms. We develop a theory of buyouts in oligopolistic markets that explains these facts. Private equity firms are more aggressive in inducing restructuring compared to incumbents since they maximize a trade sale price. The equilibrium trade sale price increases in restructuring not only by increasing the profit of the acquirer, but also by decreasing the profits of non-acquiring firms. Predictions on the exit mode and on when private equity firms can outbid incumbents in the market for corporate control are also derived.

Keywords: Acquisitions; Buyouts; Buy-to-sell; Buy-to-keep; Leveraged buyouts; Private equity; Take-overs; Temporary ownership

JEL-codes: G24; G32; G34; L10; L20

36 pages, January 2, 2010

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