research@hec - Issue #20 - (Page II)
Job Creators and Growth Stimulants?
Leveraged buyouts (LBOs) occur when a company is bought using loans, creating “leverage” to facilitate the acquisition. The purchase is often carried out through the creation of a parent company (into which capital is injected) that borrows the amount needed for the acquisition. Besides the tax benefits associated with this type of transaction, this mechanism makes it possible to borrow up to the maximum of the target company’s total self-financing capacity—taking into account all of its foreseeable cash flows. This operation has the effect of putting strong pressure on the acquired company. This pressure often translates into restructuring and cost reduction programs, as various studies from the English-speaking world have already confirmed. Does the same hold true in France?
David Thesmar, Quentin Boucly, and David Sraer show that, contrary to popular belief, LBOs in France lead to high growth in sales and employment in acquired companies. These bought-out firms grow much faster than SMEs that remain independent, particularly when it comes to family businesses.
David Thesmar is professor of finance at HEC and member of the Conseil d’Analyse Economique. He is also a member of the Cercle des économistes, a columnist with Echos, and a commentator at France Culture. In 2007 he received the prize for the Best Young Economist from Le
Monde. The themes of
his research include corporate governance, behavioral finance, the real estate market, and SMEs. He is the author, along with Augustin Landier, of Le grand
published in 2007 by Flammarion, and La
published in 2010 by Fayard.
LBOS AND PROFITS OVER THE LONG TERM An in-depth study of LBOs occurring in France over a decade has demystified the almost aggressive image of this type of transaction. Professor David Thesmar and his colleagues Quentin Boucly and David Sraer show that LBOs in France create growth and jobs in the acquired companies. “Contrary to a widely held belief, LBOs don’t suffocate companies, but (on average) they allow them to develop. Employment and sales seem to increase by more than 20% in the three years following the LBO,” explains Thesmar. Indeed, their study on 830 LBOs taking place in France between 1994 and 2004 con-
cludes that companies bought in this way experienced high growth immediately after the transaction, in comparison to a panel of companies that remained independent. Specifically, the study shows that LBO companies saw their workforce grow by 13%, their assets by 11%, and their sales by 13% more than companies that remained independent in the four years following an LBO (compared with the three years before the buyout).
LBOS: SOURCE OF GROWTH OR EXCUSE FOR RESTRUCTURING? The authors did, however, detect a difference in this beneficial effect depending on whether the LBO involves a family-owned SME (small and medium enterprise) or a division of a large corporation sold to an investment fund. In the first case, growth is accompanied by a substantial acceleration in investment, whereas in the second, investment does not increase, and restructuring effects are thus the main goal. “The natural interpretation of this phenomenon is that spin-offs have already reached their critical size within well-managed groups with internal capital markets. In contrast, independent firms are smaller than their critical size, either due to a lack of management or access to capital markets,” explains Thesmar. Family-owned SMEs must “grow to create value,” which requires skills that the initiators of LBOs can provide them with (notably knowledge and useful contacts with banks). The
Table of Contents for the Digital Edition of research@hec - Issue #20
Cover & Contents
LBOs: Job Creators and Growth Stimulants?
Inventors and the Market: A Profit-seeking Behavior
Communication Networks How is Information Transmitted?
HEC PARIS Publishing News
research@hec - Issue #20