Private Equity and the Privatization of Public Companies - A Case Study

Abstract

Due to an increased search for profitable investments in a less volatile world, firms specialized in acquiring companies quoted on a stock exchange have been granted more and more attention by media. These firms, called private equity firms, seek potential target companies where rationalization and efficiency improvements can be achieved by going private. Private equity firms use large amounts of debt when acquiring these companies which is why these transactions are called leveraged buyouts (LBO). The purpose of this study is to highlight the different incentives, financial as well as non-financial, triggering buyout activities by private equity firms. These kinds of studies can be found in the US and the UK but no similar study has been conducted on the Swedish stock exchange which is why this thesis is a case study on the Swedish market. The selected sample has been determined to Capio AB, Gambro AB, and NEA, all involved in LBOs during 2006. By using a deep qualitative research approach combined with statistical data, common factors for buyout activity have been identified. Factors as hidden values, capital structure, strategy and efficiency improvements, and more focus on long-term performance by replacing the management and board, seemed to be important when selecting buyout targets. The findings on this sample demonstrated that there were many implied reasons for a private equity firm to conduct a buyout. The characteristics found for the case companies could be related to financial theory. A peer group of companies from relevant industries was used to see if the case companies displayed unique buyout characteristics. This peer group confirmed that some certain characteristics of the case companies stood out when compared. However, a larger sample of firms should probably display more significant characteristics and make this kind of study more valid.