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Leveraged Buyouts (LBOs) came to fame during the 1980s in the United States when they contributed as a major ingredient to the hostile takeover boom at that time. The American corporate sector had experienced a dramatic increase in leveraged buyout activity between 1979 and 1989 with over 2,000 leveraged buyouts valued in excess of $250 billion (Opler and Titman 1993). The new phenomenon found a climax in 1989, when Private Equity firm Kohlberg, Kravis & Roberts (KKR) acquired RJR-Nabisco for $25 billion in a leveraged buyout takeover, a transaction almost double the size of the largest previous acquisition to that date, the $13.2 billion Chevron purchase of Gulf Oil in 1985 (Jensen 1989a). The extraordinary returns on early LBO investments had led to an inflow of large amounts of capital from investors into LBO funds (Kaplan and Stein 1993). Both the number of transactions and the average size of the deals had increased significantly during the decade. However, capital market turbulence in the late 1980s, especially following “Black Monday” on October 19, 1987 as well as changes in the financial market environment and defaults of a range of highly levered target companies led to a rapid decline of leveraged buyout activity as well as a breakdown of the associated high yield (or junk) bond market until 1990-91 (Kester and Luehrman 1995; Allen 1996).

The emergence of the LBO phenomenon during the takeover boom of the 1980s has stimulated a broad stream of academic research that analyses the effects of LBO transactions. This research in the areas of both corporate finance and strategic management can be categorized according to the focal impact of the LBO transaction into studies primarily concerned with the effect on target valuation, operational changes, impact on corporate governance and strategy, changes in the resource and capability base and profitability. The following sections are intended to give an overview of the relevant LBO literature, with special attention to value creation drivers in buyout transactions.

The purpose of the proposed study is to provide practitioners in the Private Equity industry and academia with a better understanding of the value creation process in buyout transactions. Especially, this study seeks to shed light on the drivers that lead to such successful buyout transactions and in turn to the observed “abnormal” performance in LBO funds when compared to either similar acquisitions performed by strategic buyers or to public equity market performance. More specificly, the thesis shall focus on factors influencing performance and contributing to value creation from three major sources:

Part one of the empirical results in this study follows the first research question and first pillar of the chosen research model, focusing on the market and financial drivers that may impact value creation in buyouts. The chapter commences with a detailed descriptive overview of the universe of Private Equity funds, based on the Thomson Venture Economics (“VE”) dataset. The data presentation is important as a benchmark and control group population to put into perspective the primary buyout deal data set in subsequent sections. The VE dataset focuses on the description of historical Private Equity, Venture Capital and Buyout fund investment and (fund as well as proxy deal) return trends mainly between 1983 and 2002. In addition, the transformation of the underlying investments into industry groups (using the same methodology as for the primary sample of deals) and analysis according to investment stages represents so far unpublished results on the VE database.

In the first chapter of empirical results, it was established that leveraged buyouts as part of the Private Equity investment asset class do create superior value when compared to public markets. This finding was achieved based on (i) the control population dataset from Thomson Venture Economics, which included fund return data, as well as (ii) the Limited Partners’ primary dataset of individual buyout transactions. The analysis further highlighted under which exogenous, i.e. market and acquisition related, conditions buyout transactions were more likely to be successful. Moreover, an analysis of the key financial accounting patterns both on the target company level and with respect to its underlying industry financial dynamics at the time of deal entry and exit revealed, where the value creation in buyout transactions stems from. From both the Thomson Venture Economics fund return analysis as well as the deal level findings, it became evident that the variance of success between individual deals, funds and the various General Partners was considerable. As a consequence, this second empirical chapter seeks to shed light on the non-financial, human factor “Buyout firm and its Investment Professionals”, as this factor is expected to be a key driver in the value creation process and may eventually determine success and failure of a buyout transaction.

In the first chapter of empirical results, it was established that leveraged buyouts as part of the Private Equity investment asset class do create superior value when compared to public markets. This finding was achieved based on (i) the control population dataset from Thomson Venture Economics, which included fund return data, as well as (ii) the Limited Partners’ primary dataset of individual buyout transactions. The analysis further highlighted under which exogenous (i.e. market and acquisition related) conditions buyout transactions were more likely to be successful. Moreover, an analysis of the key financial accounting patterns — both on the target company level and with respect to its underlying industry financial dynamics at the time of deal entry and exit — had revealed where the value creation in buyout transactions stems from. From both the Thomson Venture Economics fund return analysis as well as the deal level findings, it became evident that the variance of success between individual deals, funds and the various General Partners was considerable.

Due to the exploratory nature of the presented study, the amount of findings is extensive and hence will in the following be presented in form of condensed summary tables, which (i) indicate all tested variable hypotheses throughout this study, (ii) acceptance and rejection thereof, and (iii) levels of statistical significance. The latter category is particularly important with respect to the subsequent discussion and generalizability of results, in other words, their potential degree of contribution to theory building. Despite a considerably larger amount of overall findings, only results with sufficient statistical validity can be acknowledged, in line with the chosen research methodology based on a quantitative approach.