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Working Paper No. 817

Buying to Sell: A Theory of Buyouts

Working Paper
Reference
Norbäck, Pehr-Johan, Lars Persson and Joacim Tåg (2010). “Buying to Sell: A Theory of Buyouts”. IFN Working Paper No. 817. Stockholm: Research Institute of Industrial Economics (IFN).

Authors
Pehr-Johan Norbäck, Lars Persson, Joacim Tåg

Private equity firms are an important part of the industrial restructuring process. We argue that the key is temporary ownership. Buying to sell induces aggressive restructuring since the equilibrium trade sale price increases both because the profits of the acquiring incumbent increase and the profits of non-acquiring incumbents decrease. Therefore, private equity backed firms are more leveraged and have managers with more ownership as compared to incumbents. By being outsiders, private equity firms specialize in restructuring to outbid incumbents with incentives to preemptively acquire targets. Welfare effects of buyouts are ambiguous, but consumers gain from a buyout.

Pehr-Johan Norbäck

+46 (0)8 665 4522
+46 (0)73 574 3379
pehr-johan.norback@ifn.se

Joacim Tåg

+46 (0)8 665 4524
joacim.tag@ifn.se