Around the beginning of the 1980s around 14 Leveraged buyouts (LBOs) took place accounting for 1.3% of the merger and acquisition (M&A) deals. The market for LBOs really started to lift of mid 1980s due to recovery of the economy, declining interest rates, a rising stock market and the invention of a new financial product called the junk bond. The invention of the junk bond resulted in a flow of money that was followed by more aggressive deals, more defaults, lower returns, and falling interests. At the end of the 1980s LBO activity peaked for the first time, with 478 deals accounting for five to seven percent of the M&A deals and nine to twenty percent of the value of M&A deals. Over this period the number of LBOs increased with a factor of 34 and the overall market value of LBOs in the 1980s amounted between $50- and $75 billion. At the end of the 1990s another LBO wave occurred. Between 1998 and 2000 the number of LBO deals almost doubled. Many saw the doubling as a result of a failing market for corporate governance.
After the second wave, and before the subprime mortgage crisis of 2007, a third wave rose. In this period the LBO market increased once again as there was a significant period of easy access to debt. Starting in the 1980s, the total LBO deal value increased until it hit its peak in 2007 when it amounted to $700 billion. After the crisis the total deal value decreased and amounted to $150-200 billion in the post crisis era (Bruner, 2004) (Kaplan & Stromberg, 2008) (Wang, 2012).
Now after the financial crisis there is a new LBO trend, the tech buyout. Historically, LBO firms have preferred to buy more-mature companies with more-stable cash flows or predictable business cycles, so that the large debt loads associated with these kinds of buyouts could be more easily supported. But now tech firms are getting targeted. Tech firms are targeted because they are now more stable businesses then they were in the past 30 years. New successful tech LBOs like Michael Dell who together with Silver Lake Partners bought Seagate Technology, an investment that returned over 700% show that it is doable and also very lucrative if done right (Bloomberg, 2016). Besides the fact that some LBOs have shown it is possible to take tech firms private in a profitable way and not kill them, the historically low financing costs and rare opportunities for LBOs in other industries also helped to spark a new LBO wave. But where there are opportunities, there are risks too, as the number of tech firms available for investment will decline it will become harder and harder to select valuable firms that allow for successful LBOs. Furthermore, the potential increase in competition from other private equity and LBO firms will enable bigger risks and potential fall backs in estimated profits. Lastly with an increase in M&A and LBO activity, a potential consolidation of the tech industry will change the market considerable, and were change is, there is risk. For example tech firms will increase protective measures or change share rights to prevent being bought by outside firms.
I’m curious to see what the next decade will bring when the increasing M&A activity and LBO deals in the tech industry will reveal what kind of effect they had on the market.
Bibliography
Bruner, R. F., 2004. Applied mergers and acquisitions. In: s.l.:s.n.
Kaplan, S. & Stromberg, P., 2008. Leveraged buyouts and private equity. journal of economic research, Issue 1420.
Wang, Y., 2012. Secondary buyouts: Why buy and at what price?. Journal of corporate finance, pp. 1306-1325.
https://www.bloomberg.com/view/articles/2016-06-01/michael-dell-bought- company
