Syndication of European Buyouts and its Effects on Target‐Firm Performance

• Author: Nancy Huyghebaert,Randy Priem
• Date: 01 December 2016
• Published date: 01 December 2016
• DOI: http://doi.org/10.1111/jacf.12209

In This Issue: Capital Structure and Payout Policy

A Look Back at Modern Finance: Accomplishments and Limitations

An Interview with Eugene Fama

10 Eugene Fama, University of Chicago,

with Joel Stern, Stern Value Management

Proactive Leverage Increases and The Value of Financial Flexibility 17 David J. Denis, University of Pittsburgh, and

Stephen B. McKeon, University of Oregon

The Leveraging of Corporate America: A Long-Run Perspective on

Changes in Capital Structure

29 John R. Graham, Duke University, Mark T. Leary,

Washington University in St. Louis, and Michael R. Roberts,

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Capital Structure Instability 38 Harry DeAngelo, University of Southern California, and

Richard Roll, Caltech and University of California at

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Which Creditors’ Rights Drive Financial Deepening

and Economic Development?

53 Charles W. Calomiris. Columbia University, Mauricio Larrain,

Ponticia Universidad Católica de Chile, and

José Liberti and Jason Sturgess, DePaul University

The Capital Structure of PE-Funded Companies (and How New Debt Instru-

ments and Investors Are Expanding Their Debt Capacity)

60 Joseph V. Rizzi, Macro Strategies LLC and DePaul University

Seniority Differentials in High Yield Bonds: Evolution, Valuation, and Ratings 68 Martin Fridson, Lehmann Livian Fridson Advisors LLC,

Yanzhe Yang and Jiajun Wang, FridsonVision LL

Do Corporate Managers Know When Their Shares Are Undervalued?

New Evidence Based on Actual (and Not Just Announced) Stock Buybacks

73 Amy Dittmar, University of Michigan, and

Laura Casares Field, University of Delaware

A Primer on the Financial Policies of Chinese Firms:

A Multi-country Comparison

86 Marc Zenner, Peter McInnes, Ram Chivukula, and

Phu Le, J.P. Morgan

Syndication of European Buyouts and its Effects on Target-Firm Performance 96 Nancy Huyghebaert, KU Leuven, and Randy Priem,

Financial Services and Markets Authority

Don’t Waste a Free Lunch: Managing the Advance Refunding Option 118 Andrew Kalotay, Andrew Kalotay Associates, Inc. and

Lori Raineri, Government Financial Strategies

The Economic Impact of Chapter 11 Bankruptcy versus Out-of-Court Restructuring 124 Donald Markwardt, Claude Lopez, and Ross DeVol,

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VOLUME 28 | NUMBER 4 | FALL 2016

APPLIED CORPORATE FINANCE

Journal of

Journal of Applied Corporate Finance • Volume 28 Number 4 Fall 2016 95

Syndication of European Buyouts and its

Effects on Target-Firm Performance

* We wish to thank the Editor, Dr. Chew, for his support in revising the paper. Also,

we are grateful to Katrien Bosquet, Axel Buchner, Katrien Craninckx, Douglas Cumming,

Nico Dewaelheyns, Bart Dierynck, Xanthi Gkougkousi, Sandrine Kablan, YingChou Lin,

Alexander Ljungqvist, Rosy Locorotondo, Miguel Meuleman, Mathieu Luypaert, Holger

Mueller, Armin Schwienbacher, Piet Sercu, Ruediger Stucke, Thomas Thompson, Linda

Van de Gucht, Sander Van Konnegem, Kean Wu, and Weidong Xu for helpful comments,

discussions, and suggestions. Finally, we wish to sincerely thank Agentschap voor Inno-

vatie door Wetenschap en Technologie (IWT) for nancial support for this project. The

views and results expressed in this paper are those of the authors solely and not those of

the Financial Services and Markets Authority (FSMA) in Belgium. This paper does not

legally bind the FSMA in any way.

1. See also Steven Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equi-

ty,” Journal of Economic Perspectives, Vol. 23, No. 1 (2009), pp. 121–146.

2. In the U.S., there has been a growing importance of such bidding consortiums (in

which two or more buyout nanciers jointly submit a bid for the target rm) in public-to-

private transactions. In contrast to the U.S., club bidding rarely occurs in Europe (0.2%

of deals in the population of European buyouts during our sample period).

3. See also Miguel Meuleman, Mike Wright, Sophie Manigart, and Andy Lockett,

“Private Equity Syndication: Agency Costs, Reputation and Collaboration,” Journal of

Business Finance & Accounting, Vol. 36, No. 5-6 (2009), pp. 616–644.

4. The syndication of VC contracts has been examined by James Brander, Raphael

Amit, and Werner Antweiler, “Venture-Capital Syndication: Improved Venture Selection

vs. The Value-Added Hypothesis,” Journal of Economics & Management Strategy, Vol.

11, No. 3 (2002), pp. 423–452; Sophie Manigart, Andy Lockett, Miguel Meuleman,

Mike Wright, Hans Landström, Hans Bruining, Philippe Desbrières, and Ulrich Hommel,

“Venture Capitalists’ Decision to Syndicate,” Entrepreneurship Theory & Practice, Vol.

30, No. 2 (2006), pp. 131–153; and Yael Hochberg, Alexander Ljungqvist, and Yang

Lu, “Whom you Know Matters: Venture Capital Networks and Investment Performance,”

Journal of Finance, Vol. 62, No. 1 (2007), pp. 251–301; among others. The syndica-

tion of bank loans has been examined by Sang Lee and Donald Mullineaux, “Monitoring,

Financial Distress, and the Structure of Commercial Lending Syndicates,” Financial

Management, Vol. 33, No. 3 (2004), pp. 107–130; Kamphol Panyagometh and Gordon

Roberts, “Do Lead Banks Exploit Syndicate Participants? Evidence from Ex Post Risk,”

Financial Management, Vol. 39, No. 1 (2010), pp. 273–299; Amir Su, “Information

Asymmetry and Financing Arrangements: Evidence from Syndicated Loans,” The Journal

of Finance, Vol. 62, No. 2 (2007), pp. 629–668; among others.

BT

he European buyout market has grow n consid-

erably since the beginnin g of the 1990s, from €4

billion invested in 1992 to €94 billion in 2008.

While deteriorating economic and financia l

conditions led to a huge drop in buyout activity thereaf ter,

investment levels started to pick up a gain in the third quarter

of 2009. As a result, the European buyout marke t was able to

fully catch up with its U.S. counterpa rt over time.1

According to the Europea n Venture Capital Associa-

tion (EVCA), about 15% of recent buyouts in Europe were

syndicated—t hat is, equity stakes in the target  rm were

acquired jointly by multiple investors. Such syndicated deal s

accounted for 44% of the total amount invested, m aking

clear that synd ication has become an important feature of the

European buyout market. Unlike t he public-to-private trans-

actions in the U.S., buyout syndicates in Europe are usu ally

not established through an auc tion procedure that produces

what are known as “club deals.”2 In Europ ean sy ndications,

the target rms a re instead sold through private negotia-

tion with a single buyout nancier, who may decide to set

up a syndicate.3 is lead na ncier then selects one or more

co-investors to join the buyout syndicate.

In this art icle, we summarize t he ndings of our recent

study of 859 European buyouts during the period 1999-2009

that examined b oth the conditions under which buyout

nanciers in Europe decide to syndicate t heir deals and how

they structu re those syndicates. In addition, our study also

attempted to determine the eect, if a ny, of such syndica-

tion decisions on the post-buyout performance of the target

companie s.

When undertak ing our study, we started with the suppo-

sition that although buyout nanciers will h ave to share the

value creation generated by the buyout upon its syndication,

they may decide to syndicate to ta ke advantage of various

benets from the syndication proces s, including the diver-

sication of dierent type s of target risk, the combination

of dierent investor information and skill sets, the increased

access to future de al ow, and the possibility of reduced

competition for target rms. en we ana lyzed the factors

that shape the structure of the buyout syndicate. We rst

examined the concentr ation of the syndicate, which was then

further decomposed into the fr action of the deal retained by

the lead nancier and the number of co-investors pa rticipat-

ing in the syndicate. We hypothesize d that lead nanciers

design their syndicate s to minimiz e the costs of syndication

that stem mainly from information and incentive problems

among investors in the buyout syndicate. Finally, to explore

whether buyout syndicates ca n be established and structured

in ways that create more rm value, we ex amined the relation

between syndicat ion decisions and the post-buyout prot-

ability and growth of t he target rm s.

Our study makes se veral contributions to the literature on

syndication and buyout syndic ation in particular. First, while

prior research has an alyzed the decision to syndicate ma inly in

the context of venture capital (VC) nancing a nd bank loans,

4

the syndication of buyout transac tions has received almost no

attention in the literature. Nonetheless, we belie ve that syndi-

cation decisions can be exa mined more accurately for buyouts

than for VC nancing and ban k loans. Indeed, VC typically

involves staged nancing, with a possible chang e in the struc-

by Nancy Huyghebaert, KU Leuven, and Randy Priem, Financial Services and Markets Authority*