Takeover Activity and the Long-Run Performance of Reverse Leveraged Buyouts

Shehzad Mian and James Rosenfeld

Financial Management, 1993, vol. 22, issue 4

Abstract: This study examines the long-term stock price performance of firms that experience a reverse leveraged buyout (LBO), and further explores the high incidence of takeover activity that occurs within this group of firms. The initial motivation for this paper was based on recent evidence showing that over a three year period an investment in a typical initial public offering (IPO) underperforms an investment in the seasoned stock of a firm of similar size and industry. Our study shows that the return performance of reverse LBOs behaves quite differently from those of IPOs. From a sample of 85 firms that had a reverse LBO during the period 1983-1988, we measure the return performance over the three-year period beginning one day after the firm goes public. Regardless of the method used to adjust returns, the sample records significantly positive cumulative abnormal returns (CARs) over the initial two-year trading period. We also find that the number of sample firms falls from 85 to just 48 by the end of the third year. Further investigation shows that 33 of the 37 "delisted" firms (38.8%) were taken over within three years after going public. In contrast, a group of 425 "comparable firms" experienced a takeover rate of just 12.1% over the same time period. Shareholders of target firms usually receive large takeover premiums from bidding firms, which suggests that the reverse LBOs' strong performance may be driven by takeover activity. Accordingly, we create two subsamples of acquired and nonacquired firms and repeat our tests. Not only does the acquired sample account for all the positive abnormal returns, the group records a CAR in excess of 100% over the three-year period.

Date: 1993
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