The Global Economic Impact of Private Equity Report 2008 - World ...

et al (2007) track the evolution of the board of publiccompanies from their IPO until 10 years later, and find thatboard independence (measured by the proportion of outsidedirectors) decreases when the manager has more influence.Coles, Daniel and Naveen (2007) show that complex firms,which have a greater need for advisors, have larger boardswith more outside directors. Linck, Netter and Yang (2007)look at public companies and find that firms structure theirboards in ways consistent with the costs and benefits ofthe monitoring and advisory roles of the board. We will alsoshow that this trade‐off of costs and benefits of monitoringis present in the context of private equity firms, and arguethat it is easier for private equity firms to identify the cost ofallocating one more experienced individual to one board.Some papers (see, for example, Adams 1998) also stress thefact that the board does not only have a monitoring role, butalso has an advisory role. Adams and Ferreira (2007) arguethat management‐friendly boards can be optimal when theadvisory role is particularly important. This view may also helpto shed some light on private equity boards.The rest of the paper is structured as follows. Section 2explains how we constructed the dataset and gives a generaldescription of the data. Section 3 studies how the boardchanges when the company becomes private, and Section 4looks at the evolution of the board after the company hasbecome private. Section 5 provides the conclusion.2. Description of the dataUsing Capital IQ, we identified all public‐to‐privatetransactions that took place in the UK from January 1998until October 2003. We identified 148 transactions, but hadto drop six cases because of the lack of data for thosespecific cases. We were then left with 142 deals, whichwere divided into three groups. These groups are:1) Proper LBOs or private equity deals – These are the88 public‐to‐private transactions where at least one ofthe sponsors is a financial institution that has investedin the equity of the company; 52) Pure management buyouts – These are the 42transactions in our sample that do not have private equityfund involvement and therefore cannot be classified asprivate equity deals. We compare these deals with theprivate equity deals as they will allow us to isolate effectsthat may be purely due to the change in the corporationstatus from public to private from those that are associatedwith the presence of a private equity group; and3) Other transactions – These are the 12 cases which areneither pure management buyouts nor transactions thatinvolved financial sponsors, i.e. professional private equityfunds. These transactions could involve a wealthy individualor a company. In most of our analysis we will analyse theselast 12 transactions together with the 42 managementbuyouts as a unique group, which will be compared withthe private equity deals. However, we have also computed allthe tables of the paper using only the 42 pure managementbuyouts as a comparison to the private equity deals, and wehave found no major difference.Figure 1 shows the distribution of the deals over the years.Notice that in the first couple of years (i.e. 1998‐1999) thereare almost only private equity‐backed LBOs, while in lateryears management buyouts and other transactions becomea substantial fraction of the deals.From Capital IQ we also identified the total value of thecompanies implied by the price paid to take them private. InTable 1, we present summary statistics for the company size. 6In Figure 2, we show the distribution of the company size forLBOs, MBOs and other transactions. LBOs are in generallarger in size than MBOs: their mean is $328 million versus$55 million for MBOs. In general, private equity companies,through their ability to raise high levels of debt, are able toacquire larger companies. The 12 other transactions alsohave a large average (i.e. $985 million), but that is mainlydriven by one very large outlier which has a value larger than$7 billion. If we drop that outlier, these transactions are notsignificantly different in size from the MBOs. LBOs also havetwo large outliers but the mean remains significantly largerthan that for MBOs, even after dropping those two outliers.We use Capital IQ and news‐runs to identify which of the 142deals have been exited and how they were exited. Then, usingthe dataset Dash, we tracked the board composition of thesecompanies for two or three years before the announcement ofthe buyout until the exit of the private equity group or until2007, whichever was later. 7We encountered several challenges when creating this timeseries. Once the company was taken private, a complexownership structure was created, with several layers ofcompanies. Therefore, it was not clear any more whichcompany housed the relevant board. For example, in somecases, the company that was originally taken private had avery small board of two people (e.g. the CEO and anothermember of management), but at the same time a newcompany was created, which owned the original one andhad a board which made all the important decisions. In othercases, several layers of companies were created, each oneowning the company below (or there were more complexownership structures, not simply vertical) and the board that5For one of these 88 buyouts we could only find the board before the company went private, not afterwards. Therefore, this company will bedropped from the analysis of changes in the boards when the companies are taken private.6Information was missing on the implied company value for two MBOs, and therefore those two are not in Table 1.7An exit takes place when the private equity sponsor (or the management that took it private in an MBO) sells its stake in the company, or whenthe company goes bankrupt. In some cases, there is an IPO, but the private equity firms retain a stake in the firm. We consider these cases exitsbecause, although the sponsor has not sold its entire equity stake, the company is not anymore a private company, but has returned to being apublic company. Secondary buyouts are also considered exits.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Corporate governance 67