THE EVOLUTION OF BUYOUT PRICING AND FINANCIAL STRUCTURE IN THE 1980S

We examine changes in the pricing and financial structure of large management buyouts in the 1980s. Over time, (1) buyout price to cash flow ratios rose in absolute terms (particularly in deals financed using public junk bonds); (2) required bank principal repayments accelerated, leading to sharply lower ratios of cash flow to total debt obligations; (3) private subordinated and bank debt were replaced by public junk debt; and (4) management teams and dealmakers took more money out of transactions up front. These patterns are consistent with an ''overheating'' phenomenon in the buyout market. Preliminary post-buyout evidence lends some support to this interpretation.