Operating Performance Consequences for European Buyout-Backed Companies. Do Buoyant Market Conditions Matter?

In this paper, we empirically examine whether buoyant market conditions in the buyout industry can explain the average post-buyout deterioration in target operating performance in Europe during the period 1999–2009. We show that the average industry-adjusted ratio of target EBITDA to sales declines by 4.26% by the third year following the transaction for targets buyout-backed in hot buyout markets, while the average target profitability increases with 1.15% by the third post-buyout year when market conditions are cold. Nonetheless, we find that, even after accounting for endogeneity problems, investors with substantial knowledge about target-country institutions not only select target companies that are more profitable and less risky before the buyout, but also create more value during the buyout, regardless of whether market conditions are buoyant.