If we take a look at some of the most notable buyouts that took place in the UK in the last decade, the evidence on the relationship between analyst following, insider ownership and the probability of being taken private is mixed. For example, in 2007 a US private equity firm Kohlberg Kravis Roberts (KKR) acquired a Swiss pharmaceutical company Alliance Boots, which was at listed on the London Stock Exchange at the time of the deal. Alliance Boots had almost no insider ownership at that time (around one-hundredth of a percent) and had relatively few analysts following it considering its size. Conversely, in 2009 the management of Regent Inns, an owner of chains of bars and restaurants, stood ready to buy out the remaining stake in the troubled company, whilst already owning more than 50% of it.
Notwithstanding the fact that Regent Inns was in shaky financial conditioned and majority management-owned, it was still followed by quite a lot of analysts (relative to its modest size). However, no definite conclusions can be made based on those isolated cases and it would be of interest to establish the relationship between analyst following, insider ownership and the probability of being bought out for UK firms by conducting an empirical study on the determinants of the probability of public-to-private deals. In our study we will also pay attention to other factors previously identified as important in the literature on this topic.
This leads us naturally to our research question and research goal. In this study we answer the following research question ―Which factors are related to the probability of a company being taken private? The research goal is to establish the relationship between analyst following, insider ownership and the probability of it being bought out. In order to meet the research goal the following objectives were set:
(1) Conduct a critical review of relevant literature on the topic;
(2) Classify the determinants of public-to-private transactions;
(3) Conduct an empirical study aimed at revealing the determinants of public-to-private transactions in the UK;
(4) Analyse the results, make conclusions and suggest possible implications for investors and the stock exchange.
Table of Contents
INTRODUCTION
CHAPTER 1. THEORETICAL BACKGROUND
1.1. Public-to-Private Transactions: Literature Review
1.2. Determinants of Public-to-Private Transactions: Classification
1.3. Case Studies: Buyouts of Alliance Boots and Regent Inns
1.4. Hypotheses Formulation
CHAPTER 2. EMPIRICAL STUDY
2.1. Research Design
2.2. Sampling and Data Collection
2.3. Empirical Results & Discussion
CONCLUSIONS
LIST OF REFERENCES
Research Goal and Main Themes
The primary research goal of this thesis is to examine the determinants of public-to-private transactions for firms listed on the London Stock Exchange, specifically focusing on the relationship between analyst following, insider ownership, and the probability of a company being taken private by institutional investors or management.
- Determinants of public-to-private (PTP) transactions in the UK market.
- The "financial visibility" hypothesis regarding analyst coverage and delisting probability.
- The influence of insider ownership (executive board holdings) on buyout likelihood.
- Application of survival models (Cox proportional hazard model) to analyze corporate control changes.
- Comparative analysis of institutional vs. management buyouts and their impact on firm structure.
Excerpt from the Book
Alliance Boots Buyout
In March 2007 Alliance Boots, a Bern-based pharmaceuticals company listed on the London Stock Exchange was taken over by one of the most prominent US private equity firms – Kohlberg Kravis Roberts (KKR). The deal was remarkable since it was the first time in history a constituent of a FTSE 100 index of a hundred most valuable firms was taken private. What follows is a brief analysis of the deal through the lens of the reasons to go private identified in previous studies (section 1.1) and summarized in section 1.2.
At the time of the buyout Alliance Boots was about four times larger than an average company traded on London Stock Exchange in 2003-2013 (5 billion pound vs. 1.2 billion pounds of net sales). In general, we expected smaller companies to go private more frequently; however as already stated, Alliance Boots’ case was unique in this respect.
Alliance Boots had a market-to-book ratio of 2.06. Whereas this number is below the mean for all companies (2.5), it indicates that Alliance still had significant growth opportunities as perceived by the market. Therefore at this point we cannot say the fact of this buyout runs contrary to research findings suggesting that lower market-to-book ratio is associated with higher probability of going private.
Company’s debt to equity ratio was 46% at the time, making it almost twice as much levered as median firm (25%). However, the fact that Alliance was taken private having higher than-average debt-to-equity ratio is not enough to suggest that the explanation offered by Bhathar and Dittmar (2009) (highly levered firms are more likely to go private since they are in need of a restructuring) since a debt-to-equity ratio is nowhere near the levels that would necessitate a change in ownership.
Summary of Chapters
INTRODUCTION: Presents the motivation for studying public-to-private transactions, defines the scope of the study (IBO, MBO, MBI), and outlines the research objectives.
CHAPTER 1. THEORETICAL BACKGROUND: Reviews existing literature on costs and benefits of public status, introduces theoretical classifications of determinants, analyzes specific case studies, and formulates testable hypotheses.
CHAPTER 2. EMPIRICAL STUDY: Describes the research design using the Cox proportional hazard model, details the sample selection and data collection process, and presents the empirical findings regarding the factors influencing buyout probability.
CONCLUSIONS: Summarizes the key findings, confirms the negative relationship between analyst following/insider ownership and buyout probability, and discusses practical implications for investors and regulators.
Keywords
Public-to-private transactions, London Stock Exchange, Institutional buyout, Management buyout, Cox model, Analyst following, Insider ownership, Financial visibility, Agency costs, Corporate governance, Leverage, Market-to-book ratio, Survival analysis, UK listed firms.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the determinants of companies abandoning their public status on the London Stock Exchange and being bought out, with a specific focus on the roles of analyst following and executive insider ownership.
What are the primary thematic areas covered?
The research covers agency costs, financial visibility, corporate ownership structures, and the probability of being targeted in institutional or management buyouts.
What is the main research question?
The central research question asks: "Which factors are related to the probability of a company being taken private?"
Which methodology is employed in the empirical research?
The study utilizes the Cox proportional hazard model to analyze the conditional probability of a firm being bought out over the period from 2003 to 2013.
What is examined in the main body of the work?
The work reviews theoretical literature on delisting, classifies the determinants of public-to-private transactions, presents case studies (Alliance Boots and Regent Inns), and conducts a quantitative analysis of a large sample of UK-listed firms.
Which keywords best describe this study?
Institutional buyout, Management buyout, Cox model, financial visibility, insider ownership, agency costs, and the London Stock Exchange.
How does "financial visibility" affect the likelihood of a buyout?
The study finds support for the financial visibility hypothesis: firms followed by a higher number of analysts are less likely to be bought out, as this monitoring reduces agency costs and information asymmetry.
What were the findings regarding insider ownership?
Contrary to some previous expectations, the empirical results show that firms with higher insider ownership (defined as shares held by executive directors) are less likely to be bought out, possibly because these managers are better able to block buyouts they view as contrary to their interests.
- Arbeit zitieren
- Maksim Adaskevich (Autor:in), 2015, Determinants of Public-to-Private Transactions. Evidence from the London Stock Exchange, München, GRIN Verlag, https://www.grin.com/document/370058
