Markets to Hierarchies and Back Again: The Implication of Management Buy‐outs for Factor Supply

Abstract

In both the United States and Europe there has been a spectacular growth in the number and importance of management buy‐outs since the late 1970s. The typical characteristics of these deals differ somewhat on either side of the Atlantic in ways which are outlined below. However, in each environment the term “buy‐out” refers essentially to the transfer of ownership of the assets of an existing firm — which may itself be an independent entity or a wholly‐owned subsidiary or division — to a new and especially established group of equity holders which intends to keep at least some of those assets in their former use. In the US buy‐outs have often involved very large asset transfers, indeed multi‐billion dollar deals have been quite frequent. The transaction is typically financed by a limited subscription of equity from specialist venture capitalists and perhaps from the firm's management, together with a very large input of debt capital. The latter has often been in the form of high coupon (so called “junk”) bonds. The characteristically high ratio of debt to equity in buy‐out finance has given rise to their American description as leveraged buy‐outs.