The relation between private equity takeovers and takeover premiums

European Accounting Association (EAA)
Publication Type:
Conference Proceeding
31st Annual Congress European Accounting Association Conference Website Papers, 2008, pp. 1 - 23
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The relation between acquisitions and takeover premiums has been extensively documented in the academic literature to date, but these studies have focused on settings whereby the takeover or merger is initiated by a market place competitor. Few studies have extensively focused on private equity takeovers, a unique phenomenon that institutional markets are currently experiencing, and which provides a new setting to understand the composition and structure of takeover premiums. The objective of this study is to provide detailed evidence on the takeover premium offered by private equity in terms of the costs of corporate governance and costs of internal compliance [especially in the light of the implementation of the Sarbanes-Oxley Act (2002)], the role of leverage to increase returns and reduce free cash flow wastage, as well as changes in the senior management team of the target firm. Using a sample of 110 private equity transactions in the United States for the period 2003 2007, the key findings are that certain public firms exhibit greater costs of compliance, indicating that the implementation of SOX imposes significant net costs that can be removed through a firms privatisation by private equity. The findings also demonstrate that excessive managerial remuneration plays an important role in dictating the magnitude of the takeover premiums offered. Finally, this study also provides support to prior literature by illustrating that benefits can be gained by acquiring firms with low levels of debt.
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