Public‐to‐Private Buyouts and Innovation
| DOI | http://doi.org/10.1111/1467-8551.12404 |
| Author | Douglas Cumming,Monika Tarsalewska,Rejo Peter |
| Published date | 01 October 2020 |
| Date | 01 October 2020 |
British Journal of Management, Vol. 31, 811–829 (2020)
DOI: 10.1111/1467-8551.12404
Public-to-Private Buyouts and Innovation
Douglas Cumming ,1,2 Rejo Peter 3and Monika Tarsalewska 4
1DeSantis Distinguished Professor,College of Business, Florida Atlantic University, Boca Raton, FL 33431,
USA, 2Visiting Professor, Birmingham Business School, University of Bir mingham, Birmingham, B15 2TY,
UK, 3DeepR Analytics Inc., 20 Bay St, Floor 11, Toronto M5J 2N8, Canada, and 4University of Exeter
Business School, Streatham Court, Streatham Campus,Rennes Drive, Exeter EX4 4PU, UK
Corresponding author email: m.tarsalewska@exeter.ac.uk
We studythe effect of public-to-private buyouttransactions on investments in innovation
using an international sample over the 1997–2017 period. We use patent counts and ci-
tations to proxy for the quantity, quality and economic importance of innovation. Our
results are based on time analysis and matched sample regressions. The data indicate
that buyouts are associated with a signicant reduction in patents and patent citations,
including a reduction in radical (i.e. more scientic) patents. When we split the sample
into institutional and management buyouts, the negative effect of buyouts is conrmed
only for institutional buyouts. This suggests that only institutional buyoutsprevent target
rms from adopting long-term investments. This nding is conrmed by reductions in in-
novator employmentand innovation efciency subsequent to going private. Moreover, the
data indicate that the negative effect is most prevalent fortransactions where the cost of
the deal’s debt nancing is higher than that of the debt post-buyout. We rule out some al-
ternative explanations for these ndings, including but not limited to outliers, truncation
bias and endogeneity.
Introduction
The global economy has undergone a profound
shift in ownership structure over the past few
decades. A signicant share of rms is now owned
by institutional investors from the private equity
(PE) industry, and the effect on target rms con-
We thank Wassim Ahmad, Cem Demiroglu, Lora Dim-
itrova, Ioannis Floros, Grzegorz Trojanowski, anony-
mous conference referees and participants at the Manch-
ester Annual CorporateFinance Conference, INFINITY,
FMA Europe and USA, and FMARCfor comments and
suggestions. We are also grateful to seminar participants
at University of Exeter, University of Bath, University
of Bergamo, University of Birmingham, University of
Central Florida, University of Kent, Florida Atlantic
University, University of Chile and National Bank of
Poland.Monika Tarsalewska acknowledges funding from
the European Union’s Horizon 2020 research and inno-
vation programme under the Marie Sklodowska-Curie
Grant Agreement No. 665778 and NationalScience Cen-
ter,Poland 2016/23/P/HS4/04032 POLONEZ. This paper
was under review over a year before Douglas Cumming
assumed the Editor-in-Chief role, and went through three
rounds of revisions.
tinues to be debated. PE rms acquire publicly
listed rms, delist them and restructure them. Post-
buyout transaction, existing theories suggest that,
theoretically, target rms’ operating performance,
investment and productivity should improve
(Jensen, 1989). The intuition is straightforward:
PE managers are value-adding active investors
that put into place efcient incentive and moni-
toring mechanisms, together with debt discipline,
to enhance rm productivity and performance
(Ahlers et al., 2017; Amess, Stiebale and Wright,
2016; Cornelli and Karaka¸s, 2015; Jensen, 1989).
In contrast, however, critics argue that PE rms
are transitory organizations (Kaplan, 1991). They
have an overly strong focus on projects with short-
term payoffs, and tend to reduce investments in
long-term projects in order to ensure they can
meet their debt-servicing obligations (Rappaport,
1990). One example of the ‘dark’ side of PE deals
is the buyout of Debenhams, a public-to-private
deal that took place in 2003 in the UK. This deal
generated enormous prots for the PE owners,
but it left the rm with massive debt, and its value
A free video abstract to accompany this article can be found online at: https://www.youtube.com/watch?v=drDjuiv8L-
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© 2020 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of BritishAcademy
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812 D. Cumming, R. Peter and M. Tarsalewska
plummeted after the IPO.1In subsequent years, it
was not able to service its debt,and was taken over
by its lenders in 2019.2Another example is the
US$24 billion buyout of Dell Technologies Inc.
by PE rm Silver Lake in 2013, which currently
stands as the largest technology rm buyout. In
this case, the company was in tatters by 2018, with
its nancial position described as follows:
Dell Technologies Inc. seems to be taking a Don-
ald Trump-like approach to determining its self-
worth: bold statements,and not a lot of information
to back them up… Dell is saddled with a boatload of
debt and a messy capital structure…3
As a result, the industry as a whole, as well as
many academics, have begun to question the posi-
tive effects of such short-term thinking.4
Additional research has explored the effects of
taking rms private in buyouttransactions, but the
empirical evidence is decidedly mixed. In fact, re-
cent evidence has provided some puzzling results
about the real outcome of buyout transactions.
Several studies show positive effects of buyouts
on the productivity and innovation of target rms
(Amess, Stiebale and Wright, 2016; Davis et al.,
2014; Lerner, Sorensen and Strömberg, 2011);
others have questioned the post-buyout results
of performance and productivity improvements
(Ayashand Rastad, 2017; Ayash and Schütt, 2016;
Bharath, Dittmar and Sivadasan, 2014; Cohn,
1https://www.ft.com/content/6fd92a0c-437d-11dc-a065-
0000779fd2ac.
2https://www.ft.com/content/b784e306-5aad-11e9-9dde-
7aedca0a081a.
3https://www.bloomberg.com/opinion/articles/2018-07-
17/dell-dvmt-vmw- buyout-math-doesn-t-compute.
4For example, Laurence Fink, the CEO of BlackRock,
said in 2015 that: ‘The effects of the short-termist phe-
nomenon are troubling (...) In the face of these pres-
sures, more and more corporate leaders have responded
with actions that can deliver immediate returns to share-
holders, such as buybacks or dividend increases, while
underinvesting in innovation, skilled workforces or es-
sential CAPEX necessary to sustain long-term growth.’
More recently, Elon Musk failed in his attempt to take
Tesla’s stock private in an effort to avoid the pub-
lic pressures of the stock market. Stephen Diamond,
associate law professor at Santa Clara University, de-
scribed him as follows: ‘Musk representsthe leading edge
of an unfortunate Silicon Valley trend: the narcissistic
CEO and the board that lacks the gravitas, experience
and independence to consider ordinary investors’ inter-
ests’ (https://www.sfchronicle.com/business/article/Tesla-
shareholders-reject-move-to- split-CEO-12970015.php).
Mills and Towery, 2014; Goergen, O’Sullivan and
Wood, 2014a, 2014b; Weir, Jones and Wright,
2015).
With these questions in mind, we revisit how
public-to-privatebuyout transactions impact long-
term investments in innovation. Although many
papers have studied operating performance, pro-
ductivity and employment changes post-buyout,
more compelling evidence about the overall effect
of buyouts on innovation would be instructive.
Davis et al.’s (2014) inuential paper on buyouts
and productivity calls particularly for research on
deals executed during the most recent buyoutwave
of 2006–2007 and the post-2008–2009 global -
nancial crisis. The 2006–2007 buyoutwave allowed
PE rms to exploit cheap access to credit, which
may have changed their motives for such trans-
actions. We note that prior work on buyouts and
innovation generally preceded the global nancial
crisis, and focused largely on US and UK data.
In this paper, we use a comprehensive sample
of public-to-private buyout transactions, and a
dataset that covers the most recent buyout wave
and nancial crisis. We study two specic transac-
tion types: institutional buyouts (IBOs) and man-
agement buyouts (MBOs). In an IBO,the PE fund
acquires a controlling interest in the target rm,
hires new management and typically exits within
5 years; in an MBO, current management takes a
large ownership stake in the company. The goals
of the two groups may be very different. IBO in-
vestors are mainly focused on delivering returns
on the transaction; MBO investors are focused on
servicing sustainable debt, as well as on long-term
planning.
To study how public-to-private buyouts im-
pact long-term innovation, we use a unique in-
ternational dataset over the 1997–2017 period.
Our measures of innovation are based on patents
registered in each country’s ofce, provided by
EPO’s Worldwide Patent Statistical Database
(PATSTAT). The depth of the data allows us to
create measures that have not been used before,
such as radical innovation and innovation ef-
ciency.
Our tests are based on before–after buyout anal-
ysis, with xed effectsand difference-in-differences
methodology for buyout and control samples of
public rms. We nd that buyouts generally re-
duce investmentsin innovation, as measured by the
number of patents and citations. These effects are
quite substantial in terms of quantity and quality.
© 2020 The Authors.British Journal of Managementpublished by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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