Research question and relevance Literature review and hypotheses Methodology and data

1. Private Equity Investors and Going Privates in Continental EuropeBastian Hinterramskogler (TU Munich)(joint with Ann-Kristin Achleitner (TU Munich) and André Betzer (University of Bonn))EFM Symposium Corporate Governance and Control Cambridge, 10th April 2009

2. Agenda Research question and relevance Literaturereviewandhypotheses Methodologyanddata Empiricalresults Preliminaryconclusions Appendix

3. Research question and relevance 1/2 • Research question • What are the investment motives of private equity investors (PE) in blockholder-based economies? • Relevance • So far, there are mainly studies for the US and UK: ‘Hardly anything is known about the LBO market in continental Europe’ (Renneboog et al., 2007) • Based on this lack of research, 3 reasons motivate us to take a closer look at continental Europe (CE) • Distinct corporate governance setting in CE • Different ownership structure (Faccio and Lang, 2002) • Weaker minority shareholder protection (La Porta et al., 1999) • Less developed market for corporate control (Franks and Mayer, 2001) • → Might affect the traditional taking private explanations • → Poses a new question: how does the blockholder-oriented ownership structure affect the PEs investment strategy?

4. Research question and relevance 2/2 • Market development of going private buyouts • Pre-credit crunch • The last global buyout wave was driven by going private buyouts • From 2005 until July 2007, going private buyouts contributed 34.5% to the stunning overall buyout volume of $1.6 trillion (Kaplan and Strömberg, 2008) • Post-credit crunch • Sharp decline in worldwide going private activity, however, CE seems to have resisted this trend • From July 2007 to October 2008 (end of first draft), PE investors have successfully delisted 11 CE firms for approximately €9.3 billion • → These figures are similar to comparable periods in the previous PE boom phase although they exclude additional transactions which were announced but haven’t been completed yet • There is an active policy debate in Europe about regulations concerning the private equity industry, for which an understanding of their investment behavior is crucial.

5. Agenda Research question and relevance Literaturereviewandhypotheses • traditional arguments • arguments originating from blockholder-specific governance systems Methodologyanddata Empiricalresults Preliminaryconclusions Appendix

6. Literature review and hypotheses 1/3 • Traditional going private arguments • Incentive realignment between manager and owners (Jensen/Meckling 1976; Halpern et al. 1999) • Managers might be underincentivized at low levels of ownership (-) • Managers might care about unsystematic risk exposure at high levels of ownership (+) • Leverage (Modigliani/Miller 1963 and Jensen 1989, amongst others) • Tax benefit of debt (leverage -, tax liabilites+) • Bonding benefit of debt (leverage -, fcf+, growth prospects - ) • Capital expenditures (Servaes 1994 and Halpern et al. 1999) – overinvestment (+) • Risk – stability of cash flows in order to service the increased debt liabilities (-) • Performance – stock price doesn’t fully resemble the intrinsic company value (Weir et al. 2005, -) • Semi-efficient capital markets - underperformance depicts agency conflicts within the firm • Non-semi-efficient capital markets – underperformance depicts the lack of market visibility

7. Literature review and hypotheses 2/3 • Going private arguments originating from blockholder-specific governance systems • The ownership structure has been scarcely considered in the empirical going private literature • Three competing channels evolve from the blockholder-dominated ownership structure in CE • Monitoring channel (Jensen/Meckling 1976, amongst others) • large shareholders have incentives to overcome the free-rider problem and engage in active monitoring • → PE firms should be less interested in companies where there is already effective monitoring in place • Private benefits channel (Barclay/Holderness 1989 and Bebchuk 1999, amongst others) • the largest shareholders might consume private benefits of control if there is no second large shareholder who acts as a “monitor of the monitor” • → PE firms should be less interested in companies where large shareholders consume private benefits as they demand adequate compensation for it • Irrevocable commitment channel (Shleifer/Vishny 1986 and Wright et al. 2007) • large shareholders agree to sell their shares before the official bid is announced • → PE firms are interested in companies where large shareholders offer the potential to reach irrevocable commitments as it increase the success likelihood

8. Literature review and hypotheses 3/3 • Empirical Design of Hypotheses • → We try to empirically differentiate between these channels by looking primarily at the stakes of the largest and second largest shareholder, which in our sample on average add up to 88% of the total blockholdings.

9. Agenda Research question and relevance Literaturereviewandhypotheses Methodologyanddata Empiricalresults Preliminaryconclusions Appendix

10. Methodology and data 1/2 • Methodology • We compare going private firms with publicly remaining firms by means of a binary logistic model: • Probability of entryi = ß0 + ß1Stake1i + ß2Stake2i+ ß3Managmenti+ ß4Managment2i+ ß5Leveragei+ ß6FreeCashFlowi + ß7Taxi+ ß8Capexi+ ß9Performancei + ß10Riski+ ß11Sizei + ei • Data • Going private sample • All completed transactions announced between January 1, 1997 and July 31, 2007 • Sources: Thomson’s SDC Platinum, Mergermarket and Private Equity Insight • 108 buyouts after multiple sanity checks and the elimination of transactions with missing data • Control sample • Source: Thomson Financial universe of listed companies • Selection of matching firms according to the following algorithm • All companies which are headquartered in the specific country • All companies which operate in the same two-digit SIC industry • The firm with the smallest absolute sales deviation

11. Methodology and data 2/2 • Data • Ownership data – we collect all voting blocks equal or larger than 5% • Sources • Bureau Van Dijk’s Amadeus database (BVDA) • Primary sources such as the company’s annual reports and websites • Stock market or regulatory authorities • Private directories such as e.g. the ‘Hoppenstedt Aktienführer’ in Germany • Press searches based on Factiva • Web searches based on Google • Financial data • Sources • Thomson Datastream • Annual reports

12. Agenda Research question and relevance Literaturereviewandhypotheses Methodologyanddata Empiricalresults • descriptivestatistics • Multivariate results Preliminaryconclusions Appendix

13. Empirical results - descriptive statistics 1/3 • Number of going private companies across countries

14. Empirical results - descriptive statistics 2/3 • Number and enterprise values of going private (GP) companies across time

15. Empirical results - descriptive statistics 3/3 • Going privates versus control group

16. Empirical results – multivariate analysis 1/2 16

17. Empirical results – multivariate analysis 2/2

18. Agenda Research question and relevance Literaturereviewandhypotheses Methodologyanddata Empiricalresults Preliminaryconclusions Appendix

19. Preliminary conclusions • With the second buyout wave, PE’s interest spilled over into the CE’en public equity markets. This paper addresses the dearth of PE research for the CE market by taking a first systematic look at going private buyouts. • We aim to identify the investment rationales of private equity funds against the background of the distinctive CE’en corporate governance framework. The different setting • might affect the significance of traditional going private explanations • poses a new question: how does the blockholder-oriented ownership pattern affect their investment strategy? • Our results suggest that • The traditional motives of PE investors encountered in the Anglo-Saxon markets play a major role in the CE setting → PE investors target companies with potential agency problems in order to improve the corporate governance. • PE investors prefer companies with a concentrated ownership structure and large blockholders → This implies that gaining irrevocable commitments outweighs monitoring and private benefits considerations of PE investors.