This article is based on a presentation given at the American Enterprise Institute, Conference on The History, Impact and Future of Private Equity: Ownership, Governance and Firm Performance, November 27, 2007, Washington D.C. I would like to thank John Chapman, Michael Jensen, Steve Kaplan, Josh Lerner and Annette Poulson, and especially Don Chew for helpful discussion, questions, comments, and suggestions. Research support from the Dice Center for Financial Research, the Fisher College of Business, and The Ohio State University is gratefully acknowledged.
Private Equity, Corporate Governance, and the Reinvention of the Market for Corporate Control
Article first published online: 24 SEP 2008
Copyright © 2008 Morgan Stanley
Journal of Applied Corporate Finance
Volume 20, Issue 3, pages 8–21, Summer 2008
How to Cite
Wruck, K. H. (2008), Private Equity, Corporate Governance, and the Reinvention of the Market for Corporate Control. Journal of Applied Corporate Finance, 20: 8–21. doi: 10.1111/j.1745-6622.2008.00190.x
- Issue published online: 24 SEP 2008
- Article first published online: 24 SEP 2008
In the early 1980s, during the first U.S. wave of debt-financed hostile takeovers and leveraged buyouts, finance professors Michael Jensen and Richard Ruback introduced the concept of the “market for corporate control” and defined it as “the market in which alternative management teams compete for the right to manage corporate resources.” Since then, the dramatic expansion of the private equity market, and the resulting competition between corporate (or “strategic”) and “financial” buyers for deals, have both reinforced and revealed the limitations of this old definition.
This article explains how, over the past 25 years, the private equity market has helped reinvent the market for corporate control, particularly in the U.S. What's more, the author argues that the effects of private equity on the behavior of companies both public and private have been important enough to warrant a new definition of the market for corporate control—one that, as presented in this article, emphasizes corporate governance and the benefits of the competition for deals between private equity firms and public acquirers.
Along with their more effective governance systems, top private equity firms have developed a distinctive approach to reorganizing companies for efficiency and value. The author's research on private equity, comprising over 20 years of interviews and case studies as well as large-sample analysis, has led her to identify four principles of reorganization that help explain the success of these buyout firms. Besides providing a source of competitive advantage to private equity firms, the management practices that derive from these four principles are now being adopted by many public companies. And, in the author's words, “private equity's most important and lasting contribution to the global economy may well be its effect on the world's public corporations—those companies that will continue to carry out the lion's share of the world's growth opportunities.”