SMBOs: buying time or improving performance?

On the basis of an empirical analysis of 491 UK recent secondary management buyouts (SMBOs), we find strong evidence of a deterioration in long-run abnormal returns following SMBO deals. SMBOs also perform worse than primary buyouts in terms of profitability, labor productivity, and growth. We find no evidence for superior performance of private equity (PE) backed SMBOs, compared with their non-PE-backed counterparts. It appears that a PE firm's reputation and change in management are important determinants of improvements in profitability and labor productivity, respectively. High debt and high percentage of management equity tend to be associated with poor performance measured by profitability and labor productivity. Notably, none of the buyout mechanisms (i.e., financial, governance, operating) normally associated with performance improvements generate growth during the secondary buyout phase. The results are robust to the use of alternative performance measures, alternative benchmarks, and the possibility of sample selection bias. © 2013 The Authors. Managerial and Decision Economics published by John Wiley & Sons, Ltd.