Operating Performance in Leveraged Buyouts: Evidence from 1985-1989

This study documents operating performance changes following 44 of the largest LBOs completed between 1985 and 1989. Contrary to the widely held view that these transactions were marginal, the results show that firms completing LBOs in this period experienced improvements in operating margins roughly on par with those following earlier deals. The median industry-adjusted profit margin rises by an average of 11.6% from one year before until two years after the sample LBOs. All told, the LBOs in the sample were followed by a total increase in cash flow in excess of $2.5 billion, suggesting that these transactions yielded significant efficiency gains for the investors. Increases in net cash flow were even higher.