Creating value through simulating a leveraged buyout:
an agency relationship perspective
University of Groningen Faculty of Economics and Business
Master’s thesis to obtain the degree of Msc in Business Administration Specialization Organizational and Management Control
Written by Adam Azulai
Supervisors
Dr. W. Westerman Amsterdam,
Abstract Creating value through simulating a simulated buyout
Abstract
This paper presents a theoretical foundation for a specialized management incentive program inspired by leveraged buyouts: the simulated buyout. Literature on leveraged buyouts argues that alleviating the agency problem causes a significant amount of value creation. By simulating the main determinants of leveraged buyouts in a management incentive program, this study argues that an equity-based compensation scheme (“simulated buyout”) may have about the same impact on firm value. This impact was operationalized by listing a number of interventions that form the direct drivers of value. To test this rationale, a fictional case was presented to 25 partners of Corporate Finance departments in the Grant Thornton network, asking them to what extent they thought the simulated buyout is feasible and the created value is realistic. Considering the ambiguous conclusions on soft issues such as agency problems, and the fact that the simulated buyout is fairly experimental, it is no wonder that there is significant diversity in the survey answers. Therefore, to come to an informed conclusion on the feasibility of an SBO, empirical testing is necessary.
Keywords: Agency relationship; Leveraged buyout; Management incentive program; Equity-based compensation
Preface Creating value through simulating a leveraged buyout
Preface
This thesis has been written as a finalizing work to obtain the degree of Master of Science in Business Administration. The subject was brought forward by the Corporate Finance department of Grant Thornton, and their assignment was clear: contribute to the understanding of why a buyout inspired management incentive program motivates management, and why it may work better in some situations than it does in others. This subject excited me because I felt it was a perfect blend of Finance and Control: a financially constructed management incentive program in combination with soft non-financial underlying rationale. Hopefully my intention of producing an even blend of finance and control aspects that fit nicely in each other can be recognized throughout this thesis.
The simulated buyout is a very practical program and may seem rigid at times. In addition, with a theoretical framework that mainly consists of Anglo-Saxon literature and my, sometimes, outspoken conclusions, the reader may not always agree with the reasoning that dominates this thesis. However, if this leads to some constructive discussions, this can only benefit the simulated buyout as a program.
A thesis is primarily an individual report, however no research is ever conducted without the help of others, and this research is no exception. First of all, I would like to thank the lead partner of the Corporate Finance department of Grant Thornton, Kees Slump, for providing me with a subject that I have never doubted. Also at Grant Thornton I would like to thank Harm Koops for constantly helping me along the way and always challenging the practicality of my research, despite his, sometimes seemingly, 12-hour working days. Furthermore, I am much indebted to Dr. W. Westerman at the University of Groningen, first for introducing me to Grant Thornton, but more for thinking along with the research, providing me with useful commentary, and being undoubtedly one of the best supervisors in terms of speed; I believe receiving extensive feedback on a complete master’s thesis in two day is unparalleled. Furthermore, I would like to thank Chi Yong Tong for his infinite text technical and SPSS insight and last but not least, my parents for supporting me along the way and never questioning my motivation: mom… dad, I will finally be financially independent; congratulations!
Table of contents Creating value through simulating a leveraged buyout
Table of contents
Abstract ... I Preface ... II Table of contents ... III List of abbreviations ...V Management summary ... VI
Chapter 1 Introduction ...1
1.1 Introduction ...1
1.2 Motivation for research ...1
1.3 Research objective ...2
1.4 Research model and problem statement...2
1.4.1 Central research question...2
1.4.2 Sub-questions...3
1.4.3 Conceptual model...4
1.5 Relevance ...4
1.6 Research strategy ...5
1.7 Preconditions...7
1.8 Structure of the thesis...8
Chapter 2 The Agency Relationship...9
2.1 Introduction to the agency relationship...9
2.2 Rationale behind the agency problem ...11
2.3 The cost of agency problems...12
2.4 Monitoring and incentives...12
2.5 Headquarter-subsidiary relationship ...13
2.6 Chapter conclusion...14
Chapter 3 The Leveraged Buyout...15
3.1 Introduction to the leveraged buyout ...15
3.2 Direct Drivers of Value Creation ...16
3.2.1 Cost reductions...17
3.2.2 Asset utilization...17
3.2.3 Revenue increases...18
3.2.4 Financial Engineering...18
3.3 Indirect drivers of value creation ...18
3.3.1 Management Incentivation...19
3.3.2 Corporate Governance...19
3.3.3 Leverage...19
3.3.4 Buyout Culture...20
3.4 LBOs and the principal-agent relationship ...20
3.4.1 Limitations...21
3.5 Chapter conclusion...22
Chapter 4 The Simulated Buyout ...23
4.1 Introduction to management incentive programs...23
4.2 LBOs and Management Incentive Programs ...24
Table of contents Creating value through simulating a leveraged buyout
4.3.1 Equity ownership...26
4.3.2 The effects of debt financing and a simulated buyout...26
4.3.3 Synthesis...27
4.3.4 The simulated buyout: program specifics...28
4.4 Limitations of the SBO with regard to alleviating the agency problem ...29
4.5 Value implications of the interventions in a simulated buyout...30
4.5.1 The case of O.M. Scott & Sons Company...30
4.5.2 The case of General Dynamics...31
4.5.3 Sub conclusion...32
4.6 Chapter conclusion...32
Chapter 5 Consequences of a Simulated Buyout...33
5.1 A Simulated Buyout and its effect on control and accountability ...33
5.2 Contextual difficulties of an SBO ...34
5.2.1 The transfer pricing problem...34
5.2.2 Risk-taking...35
5.2.3 The pricing of corporate debt...36
5.2.4 Misreporting...36
5.3 Chapter conclusion...37
Chapter 6 Survey: feasibility test of the simulated buyout ...38
6.1 Motivation for the survey...38
List of abbreviations Creating value through simulating a leveraged buyout
List of abbreviations
CEO Chief Executive Officer
CF Corporate Finance
CFA Corporate Finance advisor DCF Discounted cash flow (valuation) EBIT Earnings before interest and taxes
EBITDA Earnings before interest, taxes, depreciation, and amortization
GD General Dynamics
GT Grant Thornton
HQ Headquarters
KKR Kohlberg Kravis Roberts & Co
LBO Leveraged buyout
MBI Management buy-in
MBO Management buyout
MIP Management incentive program
MT Management team
P (Statistical) probability value P&L Profit and Loss account
PT Pecuniosus Trading
SARs Stock appreciation rights
SBO Simulated buyout
Management summary Creating value through simulating a leveraged buyout
Management summary
The objective of this research was to provide a theoretical foundation for the specialized management incentive program inspired by leveraged buyouts (the simulated buyout or SBO), in particular with respect to the agency problem. To achieve this objective, the central research question was: What is the theoretical impact of an SBO on the agency problem, and to what extent does this improve firm performance, and thus value?
Firms are, in essence, ‘a nexus of contracts’: a framework of contractual relations. No contract is perfect and individuals can take advantage of that residual freedom to benefit themselves. Agency theory: the relationship in which one party (the principal) delegates work another (the agent) is the domain in which this problem falls. Traditionally, the actions of agents (management) are controlled by monitoring (such as direct observations or supervisory boards) and monetary incentives (such as bonuses and stock options). The reasoning behind monetary incentives is that to align the interests of principal and agent, the agent must be awarded some sort of monetary benefit when he serves the principal’s best interest.
In leveraged buyouts (LBOs), value creating activities have often been linked to alleviating the agency problem. Research into this aspect showed a couple of mechanisms characterized in a buyout that have a huge influence on the agency problem: management incentivation, increased managerial involvement in company equity; corporate governance, concentrated share ownership in the hands of active investors; and finally leverage, high debt burden reducing residual cash flow under manager’s control. By reducing the agency problem, managers are induced to undertake value creation activities as: reduce overhead, improve performance, increase asset utilization, and increase revenues. The previous is schematized in figure 1.
Figure 1 The causality of value drivers and value
Leveraged Buyout Alleviated Agency Problem Through: • Management Incentivation • Leverage • Corporate Governance Interventions • Reduce overhead • Increase performance • Increase revenues • Increase asset utilization
Increased Firm Value Leveraged Buyout Alleviated Agency Problem Through: • Management Incentivation • Leverage • Corporate Governance Interventions • Reduce overhead • Increase performance • Increase revenues • Increase asset utilization
Increased Firm Value
Management summary Creating value through simulating a leveraged buyout SBOs can have pitfalls however; previous research has shown some contextual issues resulting from equity-based compensation. Increased risk-taking, the effect of risk-taking on corporate debt, and misreporting (gaming) have all shown to have a negative impact on these type of programs, and in some instances destroyed rather than created value. In addition, the transfer pricing problem due to the increased managerial responsibility can cause enormous commotion among management and may destroy potential synergies that formed the rationale for an acquisition (in a HQ-subsidiary context) in the first place.
Chapter 1 Introduction Creating value through simulating a leveraged buyout
Chapter 1
Introduction
This first chapter introduces the research. It describes the motivation for research, the research objective, the research model and the problem statement. These sections form the foundation of the research. The relevance of the study and methodological issues, such as the research strategy and preconditions, will be dealt with in subsequent sections. This chapter will end with an outline of the remaining chapters of this report.
1.1 Introduction
Incentive systems are important because they inform and remind employees as to what result areas are desired and motivate them to achieve and exceed performance targets (Merchant and Van der Stede, 2007 p.393). At lower level management these result areas may involve a wide range of (often competing) areas. For top-level management however, only the bottom line counts. Fama (1980) continues by stating that managers are always concerned with the mechanics by which their performance will be judged. And given a competitive managerial labor market, when the firm’s reward system is not responsive to performance, the firm loses managers, and the best are the first to leave. Considering the impact of uncontrollable factors such as economic factors and acts of nature (Merchant and Van der Stede, 2007), designing an incentive system where pay and performance are aligned, is a highly subjective and controversial act. Managers, being inherently risk-averse, will prefer less monitoring and lower risk in the reward system. This can be achieved by decoupling pay from performance and avoiding managers to bear undue business risk (Tosi and Gomez-Mejia, 1989). Adjusting for too many ‘uncontrollable’ factors, and too radically decoupling pay from performance, may result in managers receiving bonuses even when the company faces near bankruptcy.
These complexities of designing incentive programs are avoided in buyouts, where management is required to invest in their company and the return on their investment is a sole function of firm value (Loos, 2005). The fact that there is no adjustment for uncontrollable factors is partly compensated by increasing management’s autonomy, effectively increasing their scope of control. Buyouts emphasize the effects separation of ownership and control can have on firm value. This is the subject of the principal-agent relationship and it is not unlikely that value created in buyouts is a function of reduced agency problems. The ‘downside’ of buyouts is that it transfers wealth from shareholders to private equity investors. This research will therefore explore the potential of simulating a buyout in a management incentive program.
1.2 Motivation for research
Chapter 1 Introduction Creating value through simulating a leveraged buyout
Kees Slump was convinced that in order to achieve a high performance, intrapreneurship and motivation are essential, and buyouts have a significant positive effect on these aspects. Inspired by (management) buyouts, the Corporate Finance department developed a management incentive program (MIP) in which management can purchase a portion of the profit. This is structured in the form of Stock Appreciation Rights. In other words, management receives a cash payment based on the increase in the value of shares. This is essentially a form of equity participation also used in buyouts. Kees Slump stated that the MIP indeed has a positive track record; indicating that the program does, in fact, lead to a higher performance (and a higher firm value). What lacked however was a clear understanding of the causal relationships leading to the increase in firm value. Is there a direct causal relationship between equity participation and motivation? Is there a direct causal relationship between motivation and firm value? Moreover, are they causal relationships and not just correlated relationships? It is these questions that form the motivation for this research. In my opinion, agency problems play a central role in the causality between the MIP and value creation.
1.3 Research objective
The objective of this research is to develop and contribute to the literature of the impact of agency problems, and subsequently management incentive programs on firm value by providing a theoretical foundation for the specialized management incentive program as proposed in this thesis (the simulated buyout), in particular with respect to the agency problem, by providing causal relationships explaining the increase in firm value,
by giving insight into potentially contextual difficulties accompanying the Simulated Buyout, and by testing its feasibility.
1.4 Research model and problem statement
This section will describe the research model and problem statement. The problem statement consists of a central research question, sub-questions, and a conceptual model. The problem statement is the result of the research objective, research objects, and a preliminary research and theoretical framework. These four aspects are graphically depicted in the research model in figure 1.1 on the next page and lay out the path by which this research will be conducted.
1.4.1 Central research question
The central research question is the main question that this thesis will answer. Considering the research objective, the central question for this thesis is:
‘What is the theoretical impact of a simulated buyout on the agency problem, and to what extent does this improve firm performance, and thus firm value?’
Chapter 1 Introduction Creating value through simulating a leveraged buyout
thesis. Rest assured however, that possible conflicting theories will be fully taken into account, and that no compromise will be made with respect to the internal validity of the research.
Figure 1.1 Research model
Literature on agency problems Preliminary research Literature on equity participation and contextual problems Literature on equity participation and value creation Literature on leveraged buyouts Conceptual Model Leveraged buyouts Agency problems Simulated buyout
Buyout inspired MIP
Analytical results
Analytical results
Analytical results
Analytical results
Theoretical, firm value, and feasibilty
implications Literature on MIPs Literature on agency problems Preliminary research Literature on equity participation and contextual problems Literature on equity participation and value creation Literature on leveraged buyouts Conceptual Model Leveraged buyouts Agency problems Simulated buyout
Buyout inspired MIP
Analytical results
Analytical results
Analytical results
Analytical results
Theoretical, firm value, and feasibilty
implications
Literature on MIPs
1.4.2 Sub-questions
The central research question can be divided into a number of questions. By answering these sub-questions it is possible to give a comprehensive and complete answer to the central research sub-questions. The sub-questions can be divided into four topics: the agency relationship, the leveraged buyout, the simulated buyout, and a laboratory experiment.
The agency relationship
1. How do agency problems create costs (destroy value), and what are the conventional methods of dealing with agency problems?
The leveraged buyout
2. What are the characteristics of a leveraged buyout, to what extent does this create value and in what way does this relate to the agency problem?
The simulated buyout
3. How is a simulated buyout structured, to what extent can it simulate a leveraged buyout, and how does it differ from a regular incentive plan?
Chapter 1 Introduction Creating value through simulating a leveraged buyout
5. What are the value implications of the interventions in a simulated buyout?
6. What is the impact of a simulated buyout on the responsibility and accountability of management? 7. What are the potential contextual difficulties accompanying the simulated buyout?
Survey
8. To what extent is the simulated buyout feasible in practice and to what extent is the assumed value creation realistic?
1.4.3 Conceptual model
The conceptual model is constructed of the concepts that will be used in the research. It defines what will be researched, and what will not (Verschuren and Doorewaard, 2007). The conceptual model for this research is portrayed in figure 1.2. The model is portrayed backwards since it is expected that the existence of an agency problem triggers the implementation of a simulated buyout. Indeed, no agency problem would make the simulated buyout fairly redundant. The simulated buyout is formed by literature on leveraged buyouts, management incentives programs, and the buyout induced management incentive program designed by the Corporate Finance department of Grant Thornton. The implications of this simulated buyout on agency problems and subsequently firm value are researched. In addition, potential contextual difficulties inherent to the simulated buyout will also be examined.
Figure 1.2 Conceptual model
Leveraged buyout
Management incentive programs
- traditional - buyout induced
Agency problems Simulated buyout
Implications on Firm Value Contextual difficulties Leveraged buyout Management incentive programs - traditional - buyout induced
Agency problems Simulated buyout
Implications on Firm Value
Contextual difficulties
1.5 Relevance
Modern business landscape characterizes itself by three trends that have started approximately fifty years ago and are still going on strong:
• First, there is the ongoing consolidation in nearly all sectors. • Second, globalization forces companies to expand across borders.
Chapter 1 Introduction Creating value through simulating a leveraged buyout
These three trends reinforce the agency problem by increasing the number of subsidiaries in organizations and providing lower level management with more authorization. One of the prerequisites for an agent to cause any discrepancy in interests with a principal is for the agent to have authorization1. As will be explained in Chapter 2, agency problems create costs, and costs decrease a company’s earnings.
Although not always widely acknowledged, most motivational and compensation programs (control methods) are essentially implemented to alleviate agency problems. An alternative to conventional control methods is a simulated buyout. In trying to find an answer to the question whether or not simulated buyouts can alleviate the agency problem in the same manner as a leveraged buyout (LBO), I have conducted an in-depth study into the workings of an LBO and have read many academic articles on LBOs. When viewing the dates of all these articles, some might say I am writing this thesis about 20 years late. However, by a stroke of luck (or bad luck) the financial crisis started a global trend of deleveraging, and the LBO became a heavily disputed topic again. Where in the past some LBOs could be financed with 90% debt, no bank is nowadays still willing to allocate financing on the basis of more than 3 times EBITDA. This trend gives the simulated buyout extra potential. Parent companies find it increasingly difficult to divest problem subsidiaries, and in such a situation a simulated buyout might prove very lucrative. A simulated buyout might turn a loss-making, problem subsidiary into a valuable, profitable part of the organization2.
This social relevance forms the ultimate motivation for this research, and is also inherent to the simulated buyout. The simulated buyout is a very pragmatic type of program; however it still needs a theoretical foundation. This is simultaneously its theoretical relevance. There is much literature on the use of equity ownership in management incentive programs, however not in the context that is used in this research. For this reason, the literature used for this report draws more heavily on literature on leveraged buyouts than literature on management incentive programs.
1.6 Research strategy
Verschuren and Doorewaard (2007) distinguish five types of research strategy. The type of research primarily indicates in what way relevant material for the research will be gathered, and how this will be processed to come to the desired answers. Since the primary objective of this research is to provide a theoretical foundation for the simulated buyout (by linking theory on agency relationships and leveraged
1
The Theory of the Firm dictates separation of ownership and control, portfolio theory tells us that due to the nature of well-diversified portfolios, an individual security holder generally has no interest in personally overseeing the detailed activities of any firm. According to Fama (1980) the agency problem can mainly be attributed to these two aspects. In other words: giving the managers autonomy, and thus authorization, increases the agency problem.
2
Chapter 1 Introduction Creating value through simulating a leveraged buyout
buyouts to the existing theory on management incentive programs) this research can be defined as a theoretical oriented study. A further classification can be made into empirical and desk research. Given the nature of this research and virtually no access to company data on the effect of management incentive programs that resemble the simulated buyout, the main type of strategy for this research is desk research. The data for the desk research has been gathered by:
• A literature study; a study of books and scientific articles on the relevant subjects.
• A secondary research; a detailed report of the buyout inspired management incentive program, tailor-made for an insurance group, designed by the Corporate Finance department Grant Thornton. • Informal interviews; unstructured, informal interviews with members of the Corporate Finance
department of Grant Thornton.
Based on deductive reasoning, the general literature on agency problems, management incentive programs, and value creation in LBOs will be applied on the simulated buyout. Based on inductive reasoning, the tailor-made report of the management incentive program referred to above will be used to form the foundation for the simulated buyout.
In addition to a desk research, a survey will be conducted to ‘empirically’ test whether the expert consensus with respect to the feasibility of the simulated buyout is positive or negative. In this context the expert consensus consists of the opinions of 25 Corporate Finance partners of Grant Thornton offices around the globe. The decision for a survey was made because of the need for a unanimous and generalizable opinion. In addition, it would be impossible to arrange one-on-one interviews with enough Corporate Finance partners to gain an unbiased opinion on the simulated buyout. First, because the Corporate Finance partners are dispersed across the globe, and second, because the partners are very time conscious and in-depth interviews would take too much of their time.
The survey consists of a case describing in detail the implementation of a simulated buyout, and was sent along with a questionnaire that asked the corporate finance partner’s view on the impact of agency problems3, the feasibility of the simulated buyout (termed management incentive program in the case), the impact of the simulated buyout on agency problems, and subsequently the implications on firm value. These aspects contribute to the research objective by testing the expert consensus on the causal relationships that lead to increased firm value and by testing its feasibility.
Table 1.1 gives a clear overview of the questions, the methodology used to answer those sub-questions, the research strategy, and the type of research.
3
Chapter 1 Introduction Creating value through simulating a leveraged buyout
Table 1.1 Action plan
How do agency problems create costs and what are the conventional methods of dealing with agency problems?
To what extent is the simulated buyout feasible in real practice and to what extent is the assumed value creation realistic?
What is the impact of a simulated buyout on the responsibility and accountability of management? What is the impact of a simulated buyout on firm value?
To what degree can a simulated buyout lead to a reduction of the agency problem, also compared to a leveraged buyout?
What are the potential contextual difficulties accompanying the simulated buyout
A literature review was performed. This question has an exploring character, and is not intended to test the theory. Its aim is to provide a theoretical framework for the simulated buyout.
A literature review was performed. This question also has an exploring character, and also aims to provide a theoretical framework for the simulated buyout. This question was answered on the basis of sub-question 1 and 2, literature on MIPs, and the buyout inspired MIP designed by the aforementioned corporate finance department.
This question was answered based on the answers on sub-questions 1 to 3. This question acts as a synthesis of the previous sub-questions and combines the separate theories.
A literature review as well as third-party case studies was used. Given the unique nature of the simulated buyout, MIPs that are based on equity ownership were used as a proxy to measure the impact on firm value. To answer this question, a literature review was performed, studying the impact of increased autonomy and outcome based performance measures on the responsibility and accountability of management. What are the characteristics of a leveraged buyout, to
what extent does this create value and in what way does this relate to the agency problem?
How is a simulated buyout structured, to what extent can it simulate a leveraged buyout, and how does it differ from a regular incentive plan?
A literature review will be performed. Again, given the unique nature of the simulated buyout, MIPs that are based on equity ownership are used as a proxy to review the contextual difficulties of a simulated buyout. A fictional case was sent to 25 corporate finance partners along with a questionnaire asking to what extent they thought a simulated buyout is feasible in real practice. Desk research Desk research Desk research Desk research Desk research Desk research Desk research Survey 1 2 3 4 5 6 7 8 Qualitative Qualitative Qualitative Qualitative Qualitative Qualitative Quantitative
Nr. Sub-question Methodology Research strategy researchType of
Qualitative How do agency problems create costs and what are
the conventional methods of dealing with agency problems?
To what extent is the simulated buyout feasible in real practice and to what extent is the assumed value creation realistic?
What is the impact of a simulated buyout on the responsibility and accountability of management? What is the impact of a simulated buyout on firm value?
To what degree can a simulated buyout lead to a reduction of the agency problem, also compared to a leveraged buyout?
What are the potential contextual difficulties accompanying the simulated buyout
A literature review was performed. This question has an exploring character, and is not intended to test the theory. Its aim is to provide a theoretical framework for the simulated buyout.
A literature review was performed. This question also has an exploring character, and also aims to provide a theoretical framework for the simulated buyout. This question was answered on the basis of sub-question 1 and 2, literature on MIPs, and the buyout inspired MIP designed by the aforementioned corporate finance department.
This question was answered based on the answers on sub-questions 1 to 3. This question acts as a synthesis of the previous sub-questions and combines the separate theories.
A literature review as well as third-party case studies was used. Given the unique nature of the simulated buyout, MIPs that are based on equity ownership were used as a proxy to measure the impact on firm value. To answer this question, a literature review was performed, studying the impact of increased autonomy and outcome based performance measures on the responsibility and accountability of management. What are the characteristics of a leveraged buyout, to
what extent does this create value and in what way does this relate to the agency problem?
How is a simulated buyout structured, to what extent can it simulate a leveraged buyout, and how does it differ from a regular incentive plan?
A literature review will be performed. Again, given the unique nature of the simulated buyout, MIPs that are based on equity ownership are used as a proxy to review the contextual difficulties of a simulated buyout. A fictional case was sent to 25 corporate finance partners along with a questionnaire asking to what extent they thought a simulated buyout is feasible in real practice. Desk research Desk research Desk research Desk research Desk research Desk research Desk research Survey 1 2 3 4 5 6 7 8 Qualitative Qualitative Qualitative Qualitative Qualitative Qualitative Quantitative
Nr. Sub-question Methodology Research strategy researchType of
Qualitative
1.7 Preconditions
Chapter 1 Introduction Creating value through simulating a leveraged buyout
1.8 Structure of the thesis
The thesis is divided in six chapters. This first chapter introduced the research. It described the background, the objective, the relevance, and the methodology of this research. In addition, this chapter described the central research question and the sub-questions that form the basis for the different chapters. Chapter two and three discuss the theoretical framework that forms the foundation for the simulated buyout. Chapter two discusses agency problems; its impact on firm value, and conventional control methods. Chapter three discusses the leveraged buyout, the drivers of value and its relationship with agency problems. Chapter four introduces the simulated buyout and acts as a synthesis of the previous two chapters, connecting the theory to the simulated buyout. Chapter four continues by discussing the potential implications of a simulated buyout on firm value, and by addressing any potential contextual difficulties that accompany the simulated buyout. Chapter five introduces the case and questionnaire used for the survey and discusses the results. Lastly, chapter six will conclude this research and give recommendations for future research. The above is summarized in figure 1.3.
An important comment that must be made is that there are two types of notes in this thesis: footnotes and endnotes. Footnotes, recognizable by Arabic numerical superscripts, are invaluable to the text, providing clarification that is out of context in the regular text. Endnotes, represented by Roman numericals, are examples, rare exceptions, and detailed clarifications.
Figure 1.3 Thesis outline
Chapter 4 The simulated buyout Chapter 3 The leveraged buyout Chapter 7 Conclusion Limitations recommendations Chapter 6 Case discussion and results
Literature review Empirical research
Chapter 2 The Agency Relationship Creating value through simulating a leveraged buyout
Chapter 2
The Agency Relationship
When it was finished, RJR Nabisco had the Taj Mahal of corporate hangars […]. The cost hadn't gone into the hangar itself, but into an adjacent three-story building, surrounded by $250,000 in landscaping, complete with a Japanese garden. Inside a visitor walked into a stunning three-story atrium. The floors were Italian marble, the walls and doors lined in inlaid mahogany. More than $600,000 in new furniture was spread throughout, topped off by $100,000 in objects d'art […]. Among the building's other features: a walk-in wine cooler; a "visiting pilots' room"; […] and a "flight-planning room", packed with state-of-the-art computers. All this was necessary to keep track of RJR Nabisco's thirty-six corporate pilots and ten planes, widely known as RJR Air Force.
– Barbarians at the Gate: The Fall of RJR Nabisco, 1990, p. 94
The literature review is divided in two chapters: one on the agency relationship and one on leveraged buyouts. This first chapter describes the agency relationship: when, why, and how it is formed. An introduction is given first, explaining the agency problem and also shortly discussing opponents of the agency theory. Hereafter, the rationale behind the agency problem and its impact on costs will be discussed in sections 2.2 and 2.3. Next, the conventional ways of controlling the acts of agents will be described in section 2.4, and lastly we will go into the special situation of the headquarters-subsidiary relationship in section 2.5.
2.1 Introduction to the agency relationship
According to Jensen and Meckling (1976) the firm is not an individual. It is a legal fiction that serves as a focus for a complex process in which conflicting objectives of individuals are brought into equilibrium within a framework of contractual relations. This definition of the firm says that characterizing the firm as an individual is inaccurate; rather the organizational behavior is the result of a complex equilibrium process. In more modern literature the above definition of the firm is simplified to ‘a nexus of contracts’. Viewing the firm as a nexus of contracts emphasizes the fact that the core of organizations consists of resource holders related to one another, and the owners of the firm, based on contracts. These contracts or “internal rules of the game” specify the rights of each agent in the organization, performance criteria on which agents are evaluated, and the payoff functions they face (Fama and Jensen, 1983). However, no such contract is perfect and all-embracing. In fact, a perfect contract might even prove inefficient. The residual freedom for the ‘agent’ that originates from this incomplete contract is where principal-agent conflicts emerge.
Chapter 2 The Agency Relationship Creating value through simulating a leveraged buyout
assumption that individuals have self-interested behavior and that their personal goals may differ considerably from the goals their task requires them to have (Eisenhardt, 1989); some form of agent opportunism is bound to arise. The previous is inextricably connected to the separation of security ownership and control of the firm. Fama (1980) shows that this is true by considering a situation where the manager is also the firm’s sole security holder (i.e. no separation of ownership and control). In this situation there clearly is no incentive problem. When a manager is sole security holder, he can consume on the job through shirking, perquisites, or incompetence, to the point where these yield marginal expected utility equal to that provided by an additional dollar of wealth usable for consumption or investment outside of the firm (Fama, 1980)i. Since the manager is the sole claimant to the firm’s earnings, he pays directly for consumption on the job. Now, when considering a situation in which the manager is not the sole security owner, the manager has an incentive to consume more on the job than is agreed in his contract. This incentive originates since every security holder, not just the manager, pays the cost of consumptionii. It has to be noted that Fama (1980) expects that rational managerial labor markets asses ex post deviations from the contract and incorporate that into contracts on an ex ante basis (e.g. through an adjustment of the manager’s wage). This is known as ex post settling up. Ex post settling up reduces the current value of the manager’s human capital, subsequently reducing his incentive to deviate from the contract.
In contrast to the principles of utility maximization, there are many critics that argue that labeling the default human behavior as one of shirking and opportunism is unrealistic given human action is a complex issue (e.g. Donaldson, 1990; Doucouliagos, 1994; Perrow, 1986). Fong and Tosi (2007) support this view. They have studied literature of agency theory’s critics (on the estimates of incentive alignment and monitoring on performance), and came to the conclusion that (a) the default agent behavior is not one of opportunism and/or (b) that both incentive alignment and monitoring are not straightforward mechanisms for controlling agent performance. Furthermore, Tosi et al. (2000) showed that agents do not always react positively to incentive alignment and that any relationship that exists is weakly positive at best. Fong and Tosi (2007) continue that in order to implement an effective incentive alignment and monitoring system, one has to look at individual differences. They came to the conclusion that the personality trait conscientiousness exerts the greatest empirical impact on individual performance. A conscientious person is someone who is achievement-oriented, dependable, persevering, hardworking and deliberate. Fong and Tosi proved that incentives and monitoring had little to no effect on effort and performance of a conscientious person.
Chapter 2 The Agency Relationship Creating value through simulating a leveraged buyout
with conscientious individuals (or perhaps a combination of both). Since Fong and Tosi (2007) do not specify the agent’s role and since this research only focuses on ‘proven’ agency problems (such as in the case of RJR Nabisco), the theory of Fong and Tosi (2007) will be ignored in the remainder of this thesisiii-iv. Therefore, the dominating theories on agency problems come from Jensen and Meckling (1976), Fama (1980) and Fama and Jensen (1983).
2.2 Rationale behind the agency problem
Before understanding how agency problems create costs, we first have to understand the rationale behind agency problems. Sappington (1991) provides a canonical setting under which it may be possible for a principal to induce the agent to behave exactly as the principal would if the principal shared the agent’s skill and knowledge. Sappington mentions four special features that lead to his canonical setting. These special features are summarized in table 2.1.
Clearly, a perfect occurrence of each of the special features is highly unlikely. When analyzing the four special features of the canonical setting, three issues underlying the agency problem become clear. Firstly, lack of symmetry (information asymmetry) of contractual beliefs lead to imperfect contracts, and thus contracting frictions (Sappington, 1991). Second, agents, incapable of diversifying their risk, are bound to be risk-averse. This conflicts with the presumed risk neutrality of the principal. And third, the canonical setting’s need for costlessly binding the agent to the terms of the contract and having the agent’s performance publicly observable implies the agent might behave in a self-interested manner if he is not induced to act otherwise. Jensen and Meckling (1976) support this view. They claim that both parties (principal and agent) are utility maximizers, and as a consequence there is good reason to believe that the agent will not always act in the best interest of the principal. The fact that agents are inherently risk-averse and often have asymmetric information at the expense of the principal (e.g. managers have more information than shareholders about whether they are capable of meeting shareholders’ objectives) reinforces their incentive for self-interested behavior.
Table 2.1
Four special features that lead to the canonical setting of the principal-agent relationship
• Symmetry of precontractual beliefs Both agent and principal must have the same beliefs about productivity and profitability.
• Risk neutrality of the agent By diversifying their portfolio principals are presumed to be risk neutral (Fama, 1980).
• Agent can be bound costlessly to the terms of the contract
The agent’s commitment ability is perfect, any form of shirking or opportunism is therefore impossible.
• The agent’s performance is publicly observable
Chapter 2 The Agency Relationship Creating value through simulating a leveraged buyout
2.3 The cost of agency problems
In the previous section we have seen that information asymmetry, risk aversity and an individual being a utility maximizer reinforce the agent’s propensity for self-interested behavior. This self-interested behavior conflicts with the principal’s goal of maximizing its utility, consequently a goal conflict originates. This goal conflict dictates that there will be some divergence between the agent’s decisions and those decisions that would maximize the welfare of the principal (Jensen and Meckling, 1976). The dollar equivalent of the reduction in welfare experienced by the principal as a result of this divergence is also a cost of the agency relationship; Jensen and Meckling (1976) refer to this cost as the ‘residual loss’. This divergence consists of the agent consuming on the job through shirking, perquisites, incompetence or foregoing profitable (risky) investments (Fama, 1980). To make sure consumption of corporate resources is kept to a minimum, a principal can monitor the agent’s performance or design appropriate incentives for the agent (Jensen and Meckling, 1976). As a result we can define agency costs as the sum of:
1. the monitoring expenditures, including all expenditures on the part of the principal to control the behavior of the agent,
2. the incentive expenditures, all types of bonding expenditures used to align the interests of the agent with that of the principal,
3. the residual loss, the reduction in principal welfare as a result of divergence between an agent’s decisions and those decisions that would maximize welfare.
Residual loss as an agency cost is by far the most significant cost. In fact, the first two expenditures are solely incurred to reduce the residual loss of an agency problemv. This problem becomes greater as the free cash flow in an organization increases. Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital (Jensen, 1986). Ideally, shareholders would want to see free cash flow paid out by some form of dividends or share repurchases. Payouts, however, reduce the resources under managers’ control, thereby reducing managers’ power. Jensen furthermore argues that managers have incentives to cause their firms to grow beyond optimal size. This is because growth increases the managers’ power by increasing the resources under their control. The size of a firm also determines, to a large extent, the amount of compensation a manager receives (i.e. compensation is positively related to growth and size).
2.4 Monitoring and incentives
Chapter 2 The Agency Relationship Creating value through simulating a leveraged buyout
The actions and performance of a fellow worker can also serve to discipline a worker (e.g. as a benchmarking standard) (Sappington, 1991)vi. Monetary incentives are often awarded in the form of bonuses and stock options for high-level management. The reasoning is that to align the interests of principal and agent (i.e. avoid goal conflict), the agent must be awarded some sort of monetary benefit when he serves the principal’s interest best.
Although at first glance, both control mechanisms could coexist, Stroh et al. (1996) argue that organizations choose between fixed and variable pay by determining how easy it is to monitor job performance (i.e. behaviors). This is because variable pay (bonuses) and monitoring are two very distinct forms of control. Monitoring is a form of action control; it involves taking steps to ensure that agents act in the principal’s best interest by making their actions themselves the focus of control. Variable pay (or pecuniary incentives) is a form of results control; it influences actions because it causes agents to be concerned about the consequences of the actions they take. These two distinct forms of control are contingent on task programmability, organizational turbulence and expected length of an agency relationship (Stroh et al., 1996).
A programmable task is one whose requisite behaviors can be precisely defined (Eisenhardt, 1989). Agency theory dictates that task programmability will be positively related to the use of action controls and action controls based contracts (i.e. fixed compensation and the use monitoring devices). Organizational turbulence is the rapid and discontinuous change in an organization, brought by events such as restructurings, downsizings, sales and spin-offs of assets, and acquisitions (Cameron, Kim and Whetton, 1987). In this situation it is more difficult to specify the behaviors its agents need to perform, thus any form of monitoring will be highly inefficient. Finally, it is expected that in long-term relationships, the principal gains more information about the agent’s behavior and accordingly the principal can more easily have compensation contracts that are action-based rather than results-based (Eisenhardt, 1989).
So, although monitoring and incentive control mechanisms seem fairly straightforward, both mechanisms are contingent on a fair number of context-specific situations. Therefore, when designing an efficient agency control system, these factors have to be taken into careful consideration.
2.5 Headquarter-subsidiary relationship
Chapter 2 The Agency Relationship Creating value through simulating a leveraged buyout
There have been a number of articles about agency problems and control in a headquarters-subsidiary relationship, albeit focusing mostly on headquarters-foreign subsidiary relationships. Roth and O’Donnell (1996) consider the headquarters-subsidiary relationship to have a principal-agent structure. They continue by arguing that in the global industry context, three factors are critical in influencing goal incongruence (goal conflict) and information asymmetries, thereby determining the potential agency problem. The first factor is
cultural distance. Although Roth and O’Donnell (1996) see cultural distance in a cross border context (also known as psychic distance), there can also be considerable cultural differences between companies acting in the same national market. These can consist of regional differences or organizational differences. As cultural distance increases, headquarters becomes more dependent on the subsidiary for information that is either not directly available to headquarters or extremely costly for headquarters to acquire (Roth and O’Donnell, 1996). The second factor that determines the agency problem in the headquarters-subsidiary relationship concerns the strategic and operational role of the subsidiary. Roth and O’Donnell (1996) contend that the role of a subsidiary can range from global rationalization to lateral centralization. Global rationalization occurs when actions and output are fairly straightforward and relatively visible within network and the specialized knowledge needed to manage the system resides at headquarters. With lateral centralization on the other hand, the subsidiary has responsibility for a complete set of value-adding activities. Specialized knowledge is decentralized and action and output is difficult to measure. It is fair to expect that with lateral centralization information asymmetries arise that increase the agency problem. The third factor affecting the agency problem is parent commitment. Roth and O’Donnel (1996) argue that when an agent accepts and works toward organizational goals, goal incongruence between the principal and agent is reduced and, as a result, the agency problem is low.
The first two factors are calculable beforehand, the last one is more difficult to predict (and measure) and is therefore expected to have the greatest impact on moral hazard with agents.
2.6 Chapter conclusion
Chapter 3 The Leveraged Buyout Creating value through simulating a leveraged buyout
Chapter 3
The Leveraged Buyout
In June 1988, Kohlberg Kravis Roberts & Co paid $1.8 billion for Duracell, the world’s leading producer of high-performance alkaline batteries. Eight years later, in 1996, KKR resold Duracell to Gillette for the amount of $7.8 billion. How was KKR able to create $6 billion in Enterprise Value for a batteries manufacturer?
Firstly, $1.45 billion was financed with debt, bearing annual interest payments of $226 million. This heavily reduced residual free cash flows and forced managers to think about improving their company’s margins. Secondly, thirty-five of Duracell’s managers contributed about $6.3 million for their shares, investing heavily in their company’s future. Lastly, KKR removed the bureaucratic shackles from its managers, which empowered them to come up with new products (such as the nickel metal hybrid battery and the integrated battery tester) and increase its internationalization.
– The New Financial Capitalists: KKR and the Creation of Corporate Value
This chapter provides a literature review of the leveraged buyout. This chapter begins with an introduction of the leveraged buyout, explaining why and how buyouts are formed. Hereafter, the drivers behind value creation are discussed in sections 3.2 and 3.3. Lastly, the relationship between leveraged buyouts and the agency relationship will be made explicit in section 3.4.
3.1 Introduction to the leveraged buyout
A Leveraged Buyout (LBO) can be defined as a transaction in which a group of private investors, typically including management, purchases a significant and controlling equity stake in a public or non-public corporation or a corporate division, using significant debt financing, which it raises by borrowing against the assets and/or cash flows of the target firm taken private (Loos, 2005). The LBO provided the ideal form of takeover for Private Equity parties, since higher leverage usually meant easier acquisition of targets and higher returns for their investors. Unsurprisingly, the ascent of the LBO was a direct consequence of the development of the Private Equity industry.
Chapter 3 The Leveraged Buyout Creating value through simulating a leveraged buyout
management. For simplification purposes, this classification will be left out of consideration in the remainder of this thesis.
The rationale behind LBO is deceptively simple. Buyout firms feel that they can create value with a specific target company and consequently resell that company for a healthy profit after a certain period. However, with the ideal LBO candidate, the focus is not so much on creating value as it is on unlocking potential value (Baker and Smith, 2006). This implies that the ideal LBO candidate is a mature established company rather than a growing company. After all, identifying and unlocking value is easier than creating value through, for instance, organic growth. Therefore, in essence, the ideal candidate is characterized by strong, non-cyclical and stable cash flows with significant unused borrowing capacity. The firm’s service or product is preferably well established, with minimal requirements for capital expenditure, research and development, or an aggressive marketing campaign (KKR, 1989). These criteria fit nicely with the case of Duracell. Duracell’s cash flow was non-cyclical and fairly stable, the firm was hardly leveraged and the product was well established. Kohlberg Kravis Roberts & Co saw that Duracell was unhappy under the wings of Kraft and that the untapped potential for international expansion was great. The bureaucratic shackles just had to be removed from its managers and Duracell grew rapidly and profitably (Baker and Smith, 2006).
There has been a considerable amount of research as to the increased performance (and thus the creation of value) after a buyout. When reviewing these drivers of increased performance a distinction can be made between direct drivers of value creation and indirect drivers of value creation (Loos, 2005). Direct drivers have a direct effect on the operating efficiency or relate to the optimal utilization of assets of the company. Indirect drivers are non-operational in nature, but do lead to an expansion of value. These drivers are generally not straightforwardly quantifiable, but do play an important role in the overall value creation process and in many cases may be interdependent with the direct value drivers. As an example, following the buyout, management of Duracell swiftly started to tighten the control on corporate spending to facilitate their interest payments. This meant margins needed to be increased to maintain some residual free cash flow (direct value driver). The fact that the residual free cash flow was reduced in the first place by its considerable interest payments was the stimulus (indirect value driver) for management to tighten control on corporate spending.
3.2 Direct Drivers of Value Creation
Chapter 3 The Leveraged Buyout Creating value through simulating a leveraged buyout
3.2.1 Cost reductions
One of the most common direct drivers is cost reduction. Management of Duracell had a strong incentive to generate higher cash flows through better operating performance, because of the increased management ownership and high financial leverage (see also Palepu, 1990). Management ownership was inextricably connected to company welfare and high financial leverage meant a significant reduction in residual free cash flow. As a result management benefited heavily from increasing its cash flow. More specifically, management has an incentive to economize on overhead costs and increase operational performance (Lichtenberg and Siegel, 1990). This is consistent with Jensen’s (1989) view that organizational changes play an important role in efficiency gains. In contrast, Kieschnick (1987) argues that the arbitrage hypothesis explains performance improvements that are not buyout induced. This hypothesis assumes that there is an information asymmetry between the owners of the firm and the management of the firm. Therefore, in the case of undervalued equity, management might actually induce a buyout as to increase the value of the firm (as what happened with RJR Nabisco). According to the arbitrage hypothesis the performance improvements would have occurred with or without a buyout. Although this view is especially shared in relation to MBOs, Kaplan (1989) does not agree with the arbitrage hypothesis. Kaplan (1989) argues that although the potential value of a company pre-buyout can be clearly visible, unlocking it is often induced by the leveraged buyout and there is no rationale to assume that this value would be unlocked otherwise.
3.2.2 Asset utilization
Easterwood et al. (1989) show that through adjustments in working capital management capital productivity is improved. Reducing inventory levels, accelerating the collection of receivables and in some instances through an extension of the payment period to suppliers, can do this. Easterwood et al. (1989) have found that post-buyout firms have significantly improved their management of working capital.
Chapter 3 The Leveraged Buyout Creating value through simulating a leveraged buyout
3.2.3 Revenue increases
Singh (1990) found that buyouts coming back to the capital market have been able to considerably increase their revenues. Firstly, leveraged buyouts significantly increase the debt level in a company, increasing the pressure to generate cash flows to service debt (Jensen, 1989). The reduction in residual cash flow reduces the managers’ freedom of action, something managers usually find very discomforting. Additional revenue can significantly lighten this burden.
Secondly, LBO firms are known for their tendency to produce ambitious business plans, raising the standards for management performance (Loos, 2005). Through the aggressive targets and increased risk of financial distress, LBO firms are forcing company managers to work harder after the buyout or risk losing their jobs (Easterwood et. al. 1989 and Baker and Wruck, 1989). In addition, LBO firms work with buyout managers to provoke decisions that increase the strategic distinctiveness and eventually improve the competitive positioning of the company (Loos, 2005).
Lastly, the increased ownership for management as well as reduced bureaucracy (in the case of a subsidiary) often leads to a revived entrepreneurial spirit. Subsequently, this may lead to transformation of the company and new product innovations. With the Duracell case the revived entrepreneurial spirit led to an increase in internationalization (mainly Europe), the introduction of the nickel metal hybrid battery and the integrated battery tester.
3.2.4 Financial Engineering
Financial engineering as a value creator argues that the deal structure of a leveraged buyout is a direct driver of value. According to this explanation, LBO firms apply their intimate knowledge of capital market mechanisms during the acquisition process and then share their financial expertise with the buyout target company thereafter (Anders, 1992). In essence, through increased leverage and negotiating the best available terms for financing, the cost of debt is reduced, effectively increasing the return on equityvii. After the buyout, LBO firms continue to lead negotiations for the portfolio company, assisting management in negotiating bank loans, bond underwritings, initial public offerings and subsequent stock sales at terms that the portfolio company would not have been able to receive on a standalone basis (Anders, 1992; Loos, 2005).
3.3 Indirect drivers of value creation
Chapter 3 The Leveraged Buyout Creating value through simulating a leveraged buyout
For example, Jensen (1989) argues that buyouts are widely described as creating value through the reduction of agency costs. The aforementioned reduction in agency costs and conflicts is realized through a couple of mechanisms characterized in a buyout.
3.3.1 Management Incentivation
Arguably the most important change in a buyout setting is the increased involvement of management in the equity of the company. It is expected that this increase in the equity stake of the management directly increases the personal costs of inefficiency (Smith, 1990) and reduces their incentive to shirk (Jensen and Meckling, 1976). Equity participation gives management a greater stake in any value-increasing actions that are taken and thus leads to better operating and investment decision (Easterwood et al., 1989)4. In other words, buyout transactions provide a ‘carrot and a stick’ (Cotter and Peck, 2001). It is expected that this equity participation of the management directly increases the personal costs of inefficiency (Smith, 1990) and reduces their incentive to shirk. Another motivational side effect of the buyout and its respective equity participation is that management finds itself with a substantial undiversifiable equity investment and their specific human capital locked into the company. This double lock-in should give them a strong motivation to safeguard their position (Wright et al., 1992).
3.3.2 Corporate Governance
The characteristic of a buyout is that a great concentration of equity falls into the hands of active investors, which encourages closer monitoring and leads to a more active representation in the board of directors (Jensen, 1989; Smith, 1990). This means that the investor (usually an LBO association) is heavily involved in the strategic direction of the company and assessment of the management team. In addition, financial lenders have a strong incentive to monitor managements’ actions closely and to make sure the buyout company is able to meet budgets. The financial covenants and debt repayments accompanying the financing serve as clear benchmarks for the operating flexibility of the buyout company and constrain management action (Loos, 2005).
3.3.3 Leverage
Jensen (1986) was among the first to discuss the relationship between managerial discretion and residual free cash flow. According to Opler and Titman (1993), debt can induce management to act in the interest of investors in ways that cannot be duplicated with optimally designed compensation packages. This argument follows the rationale that, under normal circumstances, managers have the incentive to limit payouts to
4
Chapter 3 The Leveraged Buyout Creating value through simulating a leveraged buyout
shareholders since it effectively reduces resources under managers’ control, thereby reducing managers’ power. Debt creation however, without retention of the proceeds of the issue, enables managers to effectively bond their promise to pay out future cash flows. Therefore, in public companies, debt can be an effective substitute for dividends. In LBOs, debt creation (debt burden) is even higher, forcing managers to efficiently run the company to avoid default (Jensen, 1986; Lowenstein, 1985). In addition to restricting managerial discretion, leverage has another motivational impact. Since management has a considerable stake in the equity of the leveraged firm, debt repayment effectively increases equity value, thus increasing management’s investment value.
In contrast, increased leverage can also have a negative impact on the profitability of the firm. This is mainly the result of increased vulnerability and increased exposure to external shocks debt financing brings. This increased risk could cause risk-averse managers to alter their investment decision in such ways as to decrease the risk of the assets of the firm in order to reduce the likelihood of default (Loos, 2005).
3.3.4 Buyout Culture
Buyouts often benefit from a revived entrepreneurial spirit, which not only leads to more innovative ideas and processes, but also benefits corporate culture and lines of communication (Loos, 2005). As was also mentioned in the Duracell case, the new organizational structure often provides an atmosphere which is less constrained by corporate bureaucracy and centralism (Jensen, 1989; Lowenstein, 1985). “LBO fever” or “Buyout adrenaline” are terms some authors use to indicate the energized and highly motivated management teams that are willing to take nearly any action to make their buyout a success (Loos, 2005).
In addition, LBO firms work very differently than parent companies. Traditional parent companies and conglomerates have a very top-down approach, actively trying to make use of synergy advantages5. Conversely, in buyout companies, management can take decisions much more freely and independently. LBO firms can bring a substantial amount of knowledge into the portfolio company, acting as advisors and enablers (Loos, 2005). Examples in this field are advanced financial engineering skills, recruitment of outside advisors with industry expertise and improved access to financial markets.
3.4 LBOs and the principal-agent relationship
In discussing both types of value drivers, the principal-agent relationship has been implicitly mentioned several times. In explaining the rationale behind cost reductions, asset utilization levels and revenue increases, the principal-agent relationship seems to play a key-role. More specifically, what becomes clear
5
