Introduction

Abstract

Leveraged Buyouts (LBOs) came to fame during the 1980s in the United States when they contributed as a major ingredient to the hostile takeover boom at that time. The American corporate sector had experienced a dramatic increase in leveraged buyout activity between 1979 and 1989 with over 2,000 leveraged buyouts valued in excess of $250 billion (Opler and Titman 1993). The new phenomenon found a climax in 1989, when Private Equity firm Kohlberg, Kravis & Roberts (KKR) acquired RJR-Nabisco for $25 billion in a leveraged buyout takeover, a transaction almost double the size of the largest previous acquisition to that date, the $13.2 billion Chevron purchase of Gulf Oil in 1985 (Jensen 1989a). The extraordinary returns on early LBO investments had led to an inflow of large amounts of capital from investors into LBO funds (Kaplan and Stein 1993). Both the number of transactions and the average size of the deals had increased significantly during the decade. However, capital market turbulence in the late 1980s, especially following “Black Monday” on October 19^th, 1987 as well as changes in the financial market environment and defaults of a range of highly levered target companies led to a rapid decline of leveraged buyout activity as well as a breakdown of the associated high yield (or junk) bond market until 1990-91 (Kester and Luehrman 1995; Allen 1996).