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

took the relevant decision was not housed in the companythat was the direct owner of the original one, but two or threelayers above that. Moreover, this structure could change overthe years of the LBO, and therefore the relevant board couldbe housed in different companies over time. In order to identifywhich board to observe, we had to proceed in the followingmanner. First, we used the datasets Dash, Fame andAmadeus to reconstruct the post‐LBO ownership structureof the various companies and their subsidiaries. Then, wedownloaded the board compositions of each of thesecompanies, in order to identify the relevant board. To identifythe relevant board a certain degree of discretion had to beexercised. We took into account the hierarchical ownershipstructure and then looked at various aspects, for examplewhether an outside director was sitting on the board, or howlarge the board was. 8 We also looked at whether private equitygeneral partners were sitting on the board, since they tendedto sit only on the relevant board, while a subset of themanagement directors was reported in all the other boards.This was repeated for each year, since the relevant board wasnot necessarily in the same company through the entire timeperiod (although in most cases it was). We went throughseveral iterations, until we felt comfortable with our choice ofcompany and its board. In cases where there was uncertaintyabout which board was the relevant one, we considered morethan one board and also conducted the analysis with thealternative boards.We used Capital IQ to determine the announcement dateof the transaction. Since we only observe the board onceper year at fixed dates, the date in which we observe theboard could be very close to the announcement date, oralmost a year afterwards. Therefore, we identified the yearbefore and the year after the company was taken privateby looking at the directors of the first board observed afterthe announcement date and the last board before theannouncement date. By comparing these boards and theidentities of the directors, we could determine whether thefirst board after the announcement date was still the boardof the public company (i.e. the transition to private companyhad not been completed yet) or it was already the board ofthe private company. In some cases, however, the board onthe first date after the announcement was still a transitionalboard (especially when the board date was close to theannouncement date). For example, immediately after thetransaction, not all new board members had been nominatedto the board. In some cases, the CEO was only present inthe second board following the transaction, since at the timeof the first board the CEO had not yet been assigned. Forthis reason, the analysis in Section 3 has been conductedcomparing the characteristics of the board prior to theannouncement to the second board after the announcementdate, instead of the first board. 9The data report the date of birth and country of residenceof each director of the board. The data also provide informationon how many other boards the director was also involved in(the Dash dataset, which reports the board starts in 1996, twoyears before the first LBO in the dataset, but it also reports howmany directorships the director had before 1996, although wedo not have that information year by year). The data also includeinformation (SIC code) on which industries the companiesbelong to, the number of employees they have and theirturnover. From Capital IQ we can also determine which privateequity funds were involved in each leveraged buyout. Finally,using Capital IQ and press coverage we found how many dealshad been exited and what type of exit they had. Sixty‐five ofthe 142 deals were not exited as of August 2007: of thesedeals, 37 were pure MBOs (which are less likely to be exitedanyway) and 28 were LBOs. 10 Among the 77 exited deals, 23were secondary buyouts, 11 IPOs, two MBOs, 26 trade sales,13 bankruptcies and two exits of an unknown type.Finally, we looked for the identity of all the directors sitting onthe boards each year. We did this using a series of datasets(i.e. Capital IQ, Fame, Amadeus, Perfect Information and ageneral search in press releases) and divided the directorsinto the following categories: CEO, management, othernon‐management insiders (for example, previous CEOs),outsiders and LBO sponsors. Outside directors are directorswho neither work for the firm nor any of the private equitygroups backing the LBO, and who have no other obviousspecial relationship to the firm. A director can be classified asan LBO sponsor only after the LBO. This category identifieswhether the director is employed by one of the private equityfunds that are backing the LBO. For all other directors (alsothe ones involved in the board before the LBO) we identifythose who have some past or present connection to anyprivate equity group. 11 We also identify the outside directorswho are or have been CEOs of other companies.3. Changes in the board followingan LBO or MBOIn this section we examine changes in board characteristics(mainly size and composition) before and after the firm wastaken private and examine whether these changes aredifferent for LBOs and MBOs.The existing literature on public firms argues that some boardcharacteristics (such as size and proportion of outsidedirectors) are associated with better management incentivesand thus to better firm performance. 12 Given that private equity8As mentioned above, some boards were obviously only nominal boards and had only two or three people who were also in what we finally identifiedas the relevant board, so some boards were easy to rule out as the relevant ones.9We have conducted the same analysis by taking the first board afterwards, or the board two years before going private or any combination of thesecases, and the results do not change.10Naturally, the most recent deals were less likely to be exited because there has not been enough time, still if one considers only the LBOs that hadbeen announced by the end of 2000, 12 have not yet been exited.11For example, they sit or have sat on the board of a private equity group, or they have taken part in the past in an LBO sponsored by a private equitygroup, maybe as management.68 Large-sample studies: Corporate governanceThe Global Economic Impact of Private Equity Report 2008