SMBOs : buying time or improving performance?

This paper examines post-buyout long term abnormal performance of 491 UK secondary management buyouts (SMBOs), during the period 2000 – 2010. Our results provide strong evidence for deterioration in performance up to five years following SMBO deals. SMBOs also perform worse than primary buyouts in profitability, labor productivity, and growth. We find no evidence for superior performance of private equity (PE) backed SMBOs compared to their non-PE backed counterparts. Our panel data analysis identifies PE firms’ reputation and change in management as important determinants for improvements in profitability and labor productivity respectively. High debt and high percentage of management equity tend to be associated with poor performance measured by profitability and labor productivity. Notably none of the buyout mechanisms (i.e. financial, governance, operating) normally associated with performance improvements were able to generate growth during the secondary buyout phase. The results are robust to alternative performance measures, use of alternative benchmarks, and sample selection bias.