Buyout-Backed Initial Public Offerings

Schöber, Thomas
October 2007
University of St. Gallen, Business Dissertations;2007, preceding p1
The subjects of study of this dissertation are initial public offerings (IPOs) of companies of which financial sponsors obtained a substantial equity stake in a leveraged buyout (LBO). The analysis focuses on (i) why these transactions, referred to as buyout-backed IPOs, occur, if (and why) buyout-backed IPO activity is cyclical, (ii) the underpricing of buyout-backed IPOs, i.e. the percentage change from the offer price to the closing price on the first trading day and (iii) the long-run share price performance of buyout-backed IPO firms. The principal findings in these three areas of research are the following: (i) The main reason why financial sponsors take a portfolio company public is to initiate their exit process, which is later completed through seasoned equity offerings or a subsequent sale of the company. Most buyout-backed issuers considerably reduce their leverage with net proceeds from the IPO. Buyout-backed IPO activity is very cyclical. The occurrence of a 'wave' of buyoutbacked IPOs is contingent on an 'overhang' of buyout-backed firms that are due for an exit and on an 'open' IPO market. IPO activity of buyout-backed firms is driven by real stock returns over the prior quarters, indicating market timing attempts. (ii) Buyout-backed IPOs are significantly less underpriced than closely matched IPOs of non-buyout-backed firms ('control IPOs'). The analyses suggest that this is primarily because financial sponsors push for an initial price range that, on average, implies only a negligible discount to the fair value ('IPO discount'). Thus, the share price rises moderately on the first trading day as it adjusts to the slightly higher fair value. In contrast, the average control IPO firm files a price range that implies a sizeable IPO discount. Since this discount is only partially reduced via positive price momentum between filing and pricing the stock leaps on day one to reflect the much higher fair value. (iii) The median unadjusted buy-and-hold stock returns of buyout-backed IPO firms over periods of up to five years are positive and statistically significant but small. Abnormal returns of a portfolio of buyout-backed firms that went public in the prior five years are not significant in calendar time. In event time, the long-run share price performance is ambiguous. Yet, the data reveals that buyout-backed IPO firms outperform stock market indices over the first year of trading and that their performance deteriorates between c. 8 and 32 months after the IPO.


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