Secondary Buy-Outs

In this paper we show that SBOs do not generate a signicant improvement in the operating performance of target companies. We argue that the recent, spectacular increase in SBO activity is essentially motivated by the transient availability of cheap financing with steadily increasing market multiples that generates an incentive to "flip" investments between PE funds. We collect deal-level information on 3,811 buy-outs between 1998 and 2008 and we gather detailed firm-level financial and accounting information on 111 companies target of multiple leveraged acquisitions in the period 1998-2008. We show that first-round buyers generate a large and significant abnormal improvement in operating performance and efficiency. In contrast, SBO investors do not show statistically significant evidence of incremental performance but do generate large and significant jumps in leverage and cash squeeze-out. We investigate additional motivations for secondary acquisitions and we find that SBO activity responds surprisingly quickly to increases in industry multiples and to more favorable financing conditions such as narrowing debt spreads and equity contributions. Our results suggest the existence of residual risk-shifting to debt providers which is not priced in the cost of leveraged financing and cast doubts on the lenders' ability to assess risk exposure