Management buyout 1001919 221161669 2008-06-23T08:55:44Z Stoomagoo 7358249 /* Vendor Financing */ A '''management buyout''' ('''MBO''') is a form of [[acquisition]] where a company's existing [[manager]]s acquire a large part or all of the [[company (law)|company]]. == Overview == Management buyouts are similar in all major [[law|legal]] aspects to any other [[mergers and acquisitions|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 [[due diligence]] process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic [[warranties]] to the management, on the basis that the management know more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company. In many cases the company will already be a private company, but if it is public then the management will take it private. Some concerns about management buyouts are that the [[Information asymmetry|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. Naturally, such [[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 [[perverse incentive]]s that can reduce the efficiency of a wide range of firms - even if they remain as public companies. This represents a substantial potential [[negative externality]]. ==The Purpose of an MBO== The purpose of such a buyout from the managers' point of view may be to save their jobs, either if the [[business]] has been scheduled for closure or if an outside purchaser would bring in its own [[management team]]. They may also want to maximize the financial benefits they receive from the success they bring to the company by taking the [[profits]] for themselves. This is often a way to ward off aggressive buyers. ==Financing a Management Buyout== ===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 [[financial risk|risk]]. Management buyouts are frequently seen as too risky for a bank to finance the purchase through a loan. ===Private Equity Financing=== If a bank is unwilling to lend, the management will commonly look to [[private equity investors]] to fund the majority of buyout. A high proportion of management buyouts are financed in this way. The [[private equity investors]] will invest money in return for a proportion of the [[shares]] in the company, though they may also grant a [[loan]] to the management. The exact financial structuring will depend on the backer's desire to balance the risk with its return, with [[debt]] being less risky but less profitable than [[Capital (economics)|capital]] investment. 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 [[profitability]] - certain tensions can arise. The backers will invariably impose the same [[warranties]] on the management in relation to the company that the sellers will have refused to give the management. This "[[warranty gap]]" means that the management will bear all the risk of any defects in the company that affects its value. As a condition of their investment, the backers will also impose numerous [[contracts|terms]] on the management concerning the way that the company is run. The purpose is to ensure that the management run the company in a way that will maximise the returns during the term of the backers' investment, whereas the management might have hoped to build the company for long-term gains. Though the two aims are not always incompatible, the management may feel restricted. ===Vendor 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 vendor, which must wait to receive its money after it has lost control of the company. It is also dependent 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 vendor may nevertheless agree 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 of MBOs== A classic example of an MBO involved [[Springfield Remanufacturing Corporation]], a former plant in [[Springfield, Missouri]] owned by [[Navistar]] (at that time, [[International Harvester]]) which was in danger of being closed or sold to outside parties until its managers purchased the company. In the UK, [[New Look (store)|New Look]] was the subject of a management buyout in 2004 by [[Tom Singh]], the founder of the company who had floated it in 1998. He was backed by private equity houses [[Apax]] and [[Permira]], who now own 60% of the company. An earlier example of this in the UK was the management buyout of Virgin Interactive from [[Viacom]] which was led by [[Mark Dyne]] On [[September 17]], [[2007]], [[Sir Richard Branson]] announced that the [[UK]] arm of [[Virgin Megastores]] was to be sold off as part of a [[Management buyout]], and from [[November 2007]], will be known by a new name, [[Zavvi]]. ==See also== *[[Takeover]] *[[Management buy-in]] *[[Leveraged buyout]] *[[Envy ratio]] ==External links== *[http://www.investopedia.com/terms/m/mbo.asp Definition of ''management buyout''] *[http://www.investopedia.com/terms/b/buyinmanagementbuyout.asp Definition of ''buy-in management buyout''] *[http://www.managementbuyoutadvisors.com/management_buyout.htm Management Buyout Advisory Firm] [[Category:Corporate finance]] [[Category:Management]] [[Category:Private equity]] <!--Navigation box--><br /> {{Private equity and venture capital}} [[de:Management-Buy-out]] [[it:Management buyout]] [[nl:Management buy-out]] [[ja:マネジメント・バイアウト]] [[pl:MBO]] [[ru:MBO]] [[sl:Notranji menedžerski odkup podjetja]] [[zh:管理层收购]]