Lifting the Veil on Reverse Leveraged Buyouts: What Happens During and Surrounding the Private Period?

We study the restructuring activities undertaken during the private period by reverse leveraged buyout (RLBO) firms. Using an exclusive sample, we measure changes in profitability, financial structure, and cost structure to detect restructuring activities during the private period. Approaching the private period, these firms suffer significant deterioration in earnings, while capital expenditures decrease in the presence of high leverage. Under private ownership, firms experience a significant decline in capital expenditures, retained earnings and liquidity, while leverage increases. We find a decline in cost of goods sold in conjunction with improvements in gross margin, return on assets and ratio of sales per employee during the private period. However, excessive private period personnel reductions adversely affect post-RLBO performance. Firms that develop new investment opportunities during the private restructuring have a higher probability of long-run survival. We find support for the business media’s advice to avoid the “quick flips. ” Poor performance, stock delistings, and management buyouts are typical of firms with the shortest private periods, while asset growth and post-RLBO success is concentrated in firms with long private periods. Additionally, we identify ex-ante fir