Ownership Structure, Financial Discipline, and Value Creation in MENA Leveraged Buyouts

Abstract

Leveraged Buyouts (LBOs) and Management Buyouts (MBOs) have garnered increasing interest since the late 1980s, characterised by the acquisition of firms primarily financed through debt. LBOs act as a distinctive external control mechanism. By acquiring firms predominantly through debt financing, LBOs impose financial discipline by limiting managerial discretion over free cash flows, as a substantial portion is allocated to servicing debt obligations. While LBOs are well-documented in developed markets, their applicability and effectiveness in emerging economies, particularly the MENA region, remain insufficiently explored. The primary objective of the study is to explore the impact of ownership structure on the financial performance of Leveraged Buyout (LBO) transactions in the MENA region, a key emerging market region. Drawing on agency theory by Jensen & Meckling and the capital structure theory of Modigliani and Miller, the study investigates how different shareholder configurations, particularly managerial equity participation, influence LBO outcomes. The data for this study were sourced from the CAPITALIQ and Crunchbase platforms, complemented by financial reports published by the target companies. Based on a sample of 233 transactions conducted between 2000 and 2023, the research adopts a quantitative methodology grounded in a hypothetico-deductive approach. The analysis focuses on the interactions between managerial ownership, leverage, target firm size, and operational performance. The descriptive statistics for the variables Management Buyout (MBO), Indebtness, EBITDA/Enterprise Value (EV), Size, and Multiple, derived from a sample of 211 leveraged buyout (LBO) transactions, provide a comprehensive overview of the financial and operational characteristics of the studied firms, shedding light on their post-LBO value creation dynamics. The findings support the agency theory premise that managerial ownership aligns interests and enhances performance, showing a positive relationship between managerial equity stakes and financial outcomes. Conversely, the effect of leverage, central to Modigliani and Miller’s propositions, proves more nuanced, reflecting the region’s unique financial constraints and market imperfections. Firm size, meanwhile, shows no direct correlation with performance improvement. These insights underscore the complex mechanisms behind LBO success in the MENA context and offer practical and theoretical implications, particularly regarding governance practices and institutional frameworks. The study also highlights avenues for future research, including a deeper examination of regional governance dynamics and the moderating role of institutional factors—such as investor protection, financial market maturity, and political stability—to better understand the conditions driving LBO success across different national contexts.