Management buyout
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A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a
Overview
Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company and the practical consequences that follow from that. In particular, the
Some concerns about management buyouts are that the asymmetric information possessed by management may offer them unfair advantage relative to current owners. The impending possibility of an MBO may lead to principal–agent problems, moral hazard, and perhaps even the subtle downward manipulation of the stock price prior to sale via adverse information disclosure, including accelerated and aggressive loss recognition, public launching of questionable projects, and adverse earning surprises. These issues make recovery by shareholders who bring suit challenging the MBO more likely than challenges to other kinds of mergers and acquisitions.[2] Naturally, these corporate governance concerns also exist whenever current senior management is able to benefit personally from the sale of their company or its assets. This would include, for example, large parting bonuses for CEOs after a takeover or management buyout.
Since corporate valuation is often subject to considerable uncertainty and ambiguity, and since it can be heavily influenced by asymmetric or inside information, some question the validity of MBOs and consider them to potentially represent a form of insider trading.
The mere possibility of an MBO or a substantial parting bonus on sale may create
Purpose
Management buyouts are conducted by management teams as they want to get the financial reward for the future development of the company more directly than they would do as employees only. A management buyout can also be attractive for the seller as they can be assured that the future stand-alone company will have a dedicated management team thus providing a substantial downside protection against failure and hence negative press.[clarification needed] Additionally, in the case the management buyout is supported by a private equity fund (see below), the private equity will, given that there is a dedicated management team in place, likely pay an attractive price for the asset.
Financing
Debt financing
The management of a company will not usually have the money available to buy the company outright themselves. They would first seek to borrow from a bank, provided the bank was willing to accept the risk. Management buyouts are frequently seen as too risky for a bank to finance the purchase through a loan. Management teams are typically asked to invest an amount of capital that is significant to them personally, depending on the funding source/banks determination of the personal wealth of the management team. The bank then loans the company the remaining portion of the amount paid to the owner. Companies that proactively shop aggressive funding sources should qualify for total debt financing of at least four times (4X)[citation needed] cash flow.
Private equity financing
If a bank is unwilling to lend, the management will commonly look to
Although the management may not have resources to buy the company, private equity houses will require that the managers each make as large an investment as they can afford in order to ensure that the management are locked in by an overwhelming vested interest in the success of the company. It is common for the management to re-mortgage their houses in order to acquire a small percentage of the company.
Private equity backers are likely to have somewhat different goals to the management. They generally aim to maximise their return and make an exit after 3–5 years while minimising risk to themselves, whereas the management rarely look beyond their careers at the company and will take a long-term view.
While certain aims do coincide—in particular the primary aim of
As a condition of their investment, the backers will also impose numerous
The European buyout market was worth €43.9bn in 2008, a 60% fall on the €108.2bn of deals in 2007. The last time the buyout market was at this level was in 2001 when it reached just €34bn.[3]
Seller financing
In certain circumstances, it may be possible for the management and the original owner of the company to agree a deal whereby the seller finances the buyout. The price paid at the time of sale will be nominal, with the real price being paid over the following years out of the profits of the company. The timescale for the payment is typically 3–7 years.
This represents a disadvantage for the selling party, which must wait to receive its money after it has lost control of the company. It is also dependent, if an earn-out is used, on the returned profits being increased significantly following the acquisition, in order for the deal to represent a gain to the seller in comparison to the situation pre-sale. This will usually only happen in very particular circumstances. The optimum structure would be to convert the earn-out to contracted deferred consideration which has compelling benefits for the seller as it legally fixes the total future amount paid to them. It's paid like a quarterly annuity, and then the seller needs to secure the annuity by taking out a deferred consideration surety guarantee from an independent surety institution. The direct beneficiary of the surety is the seller and should the sold firm become insolvent, following its sale, with any outstanding deferred payments due the seller, then the surety will pay the money to the vendor on the purchaser's behalf.
The vendor agrees to vendor financing for tax reasons, as the consideration will be classified as capital gain rather than as income. It may also receive some other benefit such as a higher overall purchase price than would be obtained by a normal purchase.
The advantage for the management is that they do not need to become involved with private equity or a bank and will be left in control of the company once the consideration has been paid.
Examples
A classic example of an MBO involved
In the UK,
The
In Australia, another group of music and entertainment stores were subject to a management buyout in September 2009, when
Hitman is a stealth video game series developed by the Danish company IO Interactive, which was previously published by Eidos Interactive and Square Enix. IO Interactive remained a subsidiary of Square Enix until 2017, when Square Enix started seeking sellers for the studio, IO Interactive completed a management buyout, regaining their independent status and retaining the rights for Hitman, in June 2017.[7]
See also
- Takeover
- Management buy-in
- Leveraged buyout - includes secondary buyout
- Envy ratio
- Outline of organizational theory
References
- ^ Wright, Mike, Steve Thompson, and Ken Robbie. "Venture capital and management-led, leveraged buyouts: a European perspective." Journal of Business venturing 7.1 (1992): 47-71.
- ^ Badawi, Adam B.; Webber, David H. (2015). "Does the Quality of the Plaintiffs' Law Firm Matter in Deal Litigation?". The Journal of Corporation Law. 41 (2): 105. Retrieved 19 November 2019.
- ^ "European buy-out market hits a seven year low, reports the Centre for Management Buy-out Research". 2009-02-23. Archived from the original on 2010-03-15. Retrieved 2011-10-06.
- ^ "Non-Profit & Public Sector Organizations Embrace Open-Book Management by Implementing the Great Game of Business".
- ^ Brandle, Lars (24 September 2009). "Australia's Sanity In Management Buyout". Billboard. Archived from the original on 15 January 2013. Retrieved 15 March 2013.
- ^ Pallisco, Marc (26 September 2009). "Sanity Entertainment, owner of Virgin, HMV, sells to management team for undisclosed sum". RealEstateSource.com.au. Retrieved 15 March 2013.
- ^ Osborn, Alex (16 June 2017). "E3 2017: IO Interactive Officially Goes Indie, Gains Full Rights to Hitman IP". ign.com.
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