Public-to-private transactions: An empirical analysis of industry-wide wealth effects

I investigate the sources of value gains in public-to-private transactions by examining the wealth effects on industry rivals of target firms. For a sample of 279 public-to-private bids in the U.S. from 1980 to 2007, I find that agency hypothesis explains more of the cross-sectional variation in rival firms' abnormal returns at the initial bid announcements than the other suggested hypotheses. For rival firms with Tobin's q (less than one), abnormal returns are positively related to the firms' cash holdings before the relevant buyout bids and to the decline in cash holdings from before to after the bids. The median portfolio of rival firms with low Tobin's q and above-median cash holdings reduces cash holdings and capital spending significantly after a buyout bid in the industry and experiences improved return on assets. Although the median portfolio in the entire sample of rival firms reduces cash holdings and capital spending significantly after a buyout bid, only that with low Tobin's q and above-median cash holdings experiences significantly-increased return on assets. Also, rival firms that are subsequent targets within one year of buyout bids in their industries earn higher abnormal returns at the bid announcements. Rival firms with low Tobin's q and low sales growth have higher likelihoods of becoming targets within one year of buyout bids in their industries. These findings suggest that rival firms that are more prone to agency conflicts are perceived to be more likely candidates for future private buyouts and that they improve returns on assets in response to buyout threats, implying that agency cost savings is a source of value in public-to-private transactions.