85 Colum. L. Rev. 730 (1985)
Management Buyouts

handle is hein.journals/clr85 and id is 748 raw text is: MANAGEMENT BUYOUTS

Louis Lowenstein*
INTRODUCTION
The first management buyouts appeared about ten years ago.'
Then called going private, most of those transactions involved small
firms that had gone public in the hot new issue market of the late 1960s
and early 1970s. By 1974 the stock market had declined considerably,
and while the founders or managers of these new issue companies still
owned controlling interests, the benefits of being a public company had
paled. A number of them turned to their public shareholders and an-
nounced that, by one device or another, the publicly owned shares
would be bought back. The hue and cry was immediate. The decision
to go private had been made at a time picked by management, the frag-
mented public investors had no mechanism for collective bargaining,
and there was no opportunity for others to bid. Even though said to be
fair, the price was suspect.
Though the supply of these small, inadvertent public companies
has dried up since the early 1970s, management buyouts are still with
us. But while the basic conflict of interest remains, management
buyouts have in other respects changed considerably. Not until 1979
did the first management buyout much above $100 million take place,2
but now a transaction of $1 billion or even $2 billion is not remarkable.
In these larger firms, the managers do not own controlling interests, so
bidding contests have appeared. The announcement of a buyout is
often the beginning of a rather lively auction. For one group of these
larger buyouts, the median premium over the previous market price
was 58%.3
How can managers and their buying consortia pay so much? Until
recently, we could only speculate as to the answers, because once a
company went private, a veil dropped. A small but growing number of
these firms, however, have returned to the public market. What
* Professor of Law, Columbia University. B.S. 1947, L.L.B. 1953, Columbia Uni-
versity. The research assistance of Richard Coffman and Glenn Pinkerton is gratefully
acknowledged.
Bill Gary, who was my colleague for too brief a period, had to a rare degree good
judgment plus a commitment to enduring principles. At times during the writing of this
article, I thought that particular portions would have pleased him. To whatever extent
those aspirations were realized, this article is dedicated to his memory.
1. See Borden, Going Private-Old Tort, New Tort or No Tort?, 49 N.Y.U.L. Rev.
987, 987 n.1 (1974); DeAngelo, DeAngelo & Rice, Going Private: Minority Freezeouts
and Stockholder Wealth, 27 J.L. & Econ. 367, 381 (1984) [hereinafter cited as DeAngelo
& Rice].
2. See Ross, Deals: How the Champs Do Leveraged Buyouts, Fortune, Jan. 23,
1984, at 70, 74.
3. See infra text accompanying notes 30-31.

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