The Performance Of Reverse Leveraged Buyouts by SSRN

Jerry Cao

Singapore Management University – Lee Kong Chian School of Business

Josh Lerner

Harvard Business School – Finance Unit; Harvard University – Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

October 15, 2006

Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market


Reverse leveraged buyouts (RLBOs) have received increased public scrutiny but attracted little systematic study. We collect a comprehensive sample of 526 RLBOs between 1981 and 2003 and examine three- and five-year stock performance of these offerings. RLBOs appear to perform as well as or better than other IPOs and the stock market as a whole, depending on the specification. There is evidence of a deterioration of returns over time.

[Archives] The Performance Of Reverse Leveraged Buyouts – Introduction

In recent years, intense public scrutiny has surrounded the phenomenon of reverse leveraged buyouts (RLBOs), or initial public offerings (IPOs) of firms that had previously been bought out by professional later-stage private equity investors. This paper seeks to understand the long-run performance of these offerings, in order to address whether these concerns are justified.

To date, much of the discussion of these offerings has focused on a few troubled RLBOs, such as Refco, which Thomas H. Lee Partners bought a majority stake in for more than $500 million in 2004 and took public at more than double the price a year later. In one of the more than a dozen lawsuits filed after the collapse of the firm soon after its IPO, the plaintiffs asserted “there are substantial questions to be answered concerning the structure, cost and effects of the investment in Refco by Thomas H. Lee Partners in June of 2004, and Refco’s IPO in August of 2005.”

More generally, observers have argued that buyout groups push overleveraged companies too quickly into the public market. For instance, the New York Times (Sorkin, 2005) observed:

[S]everal high-profile quick flips have left critics wondering whether buyout firms were using such offerings simply to line their pockets, rather than using the proceeds to support companies. Earlier [in 2005], Blackstone sold a German chemicals company, the Celanese Corporation, to the public after owning it for less than 12 months. The firm quadrupled its money and all of the proceeds from the offering were used to pay out a special dividend to Blackstone. Mr. Kravis’s firm, Kohlberg Kravis Roberts & Company, also quadrupled its money by flipping PanAmSat, the satellite company it owned for less than a year.

A recent Wall Street Journal article on reverse leveraged buyouts (Cowan, 2006) noted that “while some debt is fine, when it is taken on to finance things that only benefit some shareholders— such as special dividends—new investors are buying hobbled companies.”

But it is plausible to wonder whether buyout groups would find such a strategy productive. Buyout groups typically hold large equity stakes in firms prior to their IPOs, and continue to retain substantial holdings subsequent to the offerings. Thus, the post-IPO long-run performance of RLBOs will have substantial wealth implications for the private equity investors. More importantly, as repeat players in the IPO market, buyout groups will suffer reputation losses if their RLBOs turn out to be failures.

These discussions suggest the desirability of a systematic look at the long-run performance of RLBOs. Surprisingly, these offerings have attracted little attention in the academic literature in recent years, despite the considerable attention devoted to the performance of venture capital-backed IPOs (Brav and Gompers, 1997; Gompers and Lerner, 1999; Hamao, Packer, and Ritter, 1999; Jain and Kini, 2000; Masulis and Li, 2005; and many others).

Several papers in the earlier literature, however, are quite relevant to this one. First, there is a literature on the evolution of LBOs. Kaplan (1991) examined 183 large leveraged buyouts executed between 1979 and 1986, and documented that a significant fraction of firms undergoing LBOs went public once again: the RLBOs in his sample remained private for a median time of 6.82 years. Muscarella and Vetsuypens (1990) examined 72 reverse leveraged buyouts between 1983 and 1987, and documented substantial increases in profitability and temporary increases in leverage when compared to the same firms prior to the LBO.

reverse leveraged buyouts

See full PDF below.