Public to private transactions, private equity and financial health in the UK: an empirical analysis of the impact of going private.

Abstract

Using a hand collected data set of 138 buy-outs, this paper presents the first analysis of the impact effects of public to private transactions (PTPs) in the UK during a period (1998-2004) in which PTPs became a significant part of the market for corporate control. We find that for all PTPs there is a significant improvement in financial health in the post deal years relative to the year before going private. We also find that there is a significant improvement in the financial health of PTPs relative to firms remaining public. The analysis of the individual elements of the z-score shows that there are significant improvements in working capital and liquidity post deal. Profitability, however, shows significant declines in a number of the post deal years. We also find that both private equity (PE) and non PE-backed deals produce improvements in financial health but that there is no difference between the two types of deal. These outcomes provide some support for the Jensen (Am Econ Rev 76:323-329, 1986, Harv Bus Rev 67:61-74, 1989) arguments that going private creates an organizational structure that reduces agency costs. However, they do suggest that the claims that the financial and governance mechanisms imposed by PE providers will produce better outcomes are strictly limited in the second wave of PTPs.