Private Equity: The Leveraged Buyout Model Revisited with a Dash of Clustering

Thumbnail Image
Schrum, Janice
Martin, James
Washburn University. School of Business
Kaw Valley Bank
Issue Date
October 2007
Alternative Title
During 2006-2007, investments in private equity firms fueled a marked acceleration in corporate merger and acquisition activity. Fueled by opportunistic equity investors and a willing debt market, acquisitions of thousands of public and private companies were announced during this period of time. Observers of this increased activity drew parallels between the private equity surge of 2006-2007 and the leveraged buyout boom of the 1980s. This paper accomplishes several related goals. First, it analyzes the private equity acquisition model and calculates key financial characteristics of private equity acquisition targets related to size, growth, and liquidity. (The target analyses are limited to acquisitions of publicly traded companies.) The outputs of these analyses are compared to prior research on leveraged buyout targets from the 1980s. Striking similarities of today's private equity driven acquisitions and the 1980 leveraged buyout market are noted. Second, this paper examines the existence of "clubbing" in today's private equity driven acquisition market. This "clubbing" activity involves the teaming up of competing private equity firms in order to complete acquisitions. Recently, federal authorities have begun to evaluate the potential anticompetitive consequences of this "clubbing" activity. the paper draws upon published research on "clubbing", clustering, and cartels when evaluating the impact of "clubbing" on the private equity merger and acquisition market.