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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 parent company or non-artificial person(s). Management-, and/or leverage (finance)d buyout (transaction) became noted phenomena of 1980s business economics. These so-called MBOs originated in the US, spreading first to the UK and then throughout the rest of Europe. The venture capital industry has played a crucial role in the development of buyouts in Europe, especially in smaller deals in the UK, the Netherlands, and France.
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 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.
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.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 perverse incentives 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 managers of the target company may at times also set up a holding company for the purpose of purchasing the shares of the target company.
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.
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.
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 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 affect its value.
As a condition of their investment, the backers will also impose numerous 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.
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.
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.
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 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.
The Virgin Group has undergone several management buyouts in recent years. On September 17, 2007, 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. On September 24, 2008, another part of the Virgin group, Virgin Comics underwent a management buyout and changed its name to Liquid Comics. In the UK, Virgin Radio also underwent a similar process and became Absolute Radio .
In Australia, another group of music and entertainment stores were subject to a management buyout in September 2009, when Sanity's owner and founder, Brett Blundy, sold BB Retail Capital's Entertainment Division (including Sanity, and the Australian franchises of Virgin Entertainment and HMV) to the company's Head of Entertainment, Ray Itaoui. This was for an undisclosed sum, leaving Sanity Entertainment to become a private company in its own right.
Hitman is a stealth video game series developed by the Danish company IO Interactive. 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.
A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company's cash flow is the collateral used to secure and repay the borrowed money. The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments often reduce corporate income tax liability, whereas dividend payments normally do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.
Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded.
Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.
KKR & Co. Inc. is an American global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and, through its strategic partners, hedge funds. The firm has completed more than 280 private equity investments in portfolio companies with approximately $545 billion of total enterprise value as of June 30, 2017. As of September 30, 2017, Assets Under Management ("AUM") and Fee Paying Assets Under Management ("FPAUM") were $153 billion and $114 billion, respectively.
IO Interactive A/S is a Danish video game developer based in Copenhagen, best known for creating and developing the Hitman franchise. IO Interactive employs 170 people as of October 2016, and operates a Malmö-based studio, IOI Malmö, since January 2019.
Providence Equity Partners LLC is an American global private equity investment firm focused on media, communications, education and information investments. The firm specializes in leveraged buyout transactions as well as growth capital investments and has invested in more than 140 companies globally since its inception in 1989.
Bain Capital is an American private investment firm based in Boston, Massachusetts. It specializes in private equity, venture capital, credit, public equity, impact investing, life sciences, and real estate. Bain Capital invests across a range of industry sectors and geographic regions. As of 2018, the firm managed more than $105 billion of investor capital.
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years. At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. From the investors' point of view, funds can be traditional or asymmetric.
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Given the absence of established trading markets for these interests, the transfer of interests in private equity funds as well as hedge funds can be more complex and labor-intensive.
Sanity is an Australian chain of music and entertainment stores and is the country's second largest retailer of recorded audio and video discs. It is privately owned by Ray Itaoui, and as of March 2015, Sanity comprises 155 outlets in every state and territory. The brand specialises in the sale of CDs, DVDs, Blu-rays and related merchandise and accessories, sold from its network of stores and website. The Sanity brand was owned and conceived by Brazin Limited from 1992, before being folded into BB Retail Capital in 2006, then became a company in its own right after it was divested to Itaoui in 2009.
Apollo Global Management, Inc., is an American private equity firm, founded in 1990 by former Drexel Burnham Lambert banker Leon Black. The firm specializes in leveraged buyout transactions and purchases of distressed securities involving corporate restructuring, special situations, and industry consolidations. Apollo is headquartered in New York City, with additional offices across North America, Europe and Asia. The company's stock is publicly traded on the NYSE under the symbol 'APO'.
Envy ratio, in finance, is the ratio of the price paid by investors to that paid by the management team for their respective shares of the equity. It is used to consider an opportunity for a management buyout. Managers are often allowed to invest at a lower valuation to make their ownership possible and to create a personal financial incentive for them to approve the buyout and to work diligently towards the success of the investment. The envy ratio is somewhat similar to the concept of financial leverage; managers can increase returns on their investments by using other investors' money.
BC Partners is a private equity firm specialising in buyouts and acquisitions financing in Europe and the United States. The firm invests across all industries. BC Partners was founded in 1986 and is based in London with additional offices in New York City, Paris, Milan and Hamburg. Since inception, BC Partners has completed 105 private equity investments in companies with a total enterprise value of €130 billion and is currently investing its tenth private equity fund.
Private equity in the 1990s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.
Private equity in the 2000s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.
MidOcean Partners is an American private equity firm specializing in leveraged buyouts, recapitalizations and growth capital investments in middle-market companies. The firm has historically focused on investments in middle market companies in four core industries including business services; consumer and leisure companies, media and niche industrial services.
Stock of a corporation, is all of the shares into which ownership of the corporation is divided. In American English, the shares are collectively known as "stock". A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
A club deal, in finance, refers to a leveraged buyout or other private equity investment that involves two or more private equity firms. It can also be referred as consortium or syndicated investment.
Entrepreneurial finance is the study of value and resource allocation, applied to new ventures. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the startup; and how should funding contracts and exit decisions be structured.
Hitman is a stealth video game developed by IO Interactive. The game was published by Square Enix for Microsoft Windows, PlayStation 4, and Xbox One in an episodic format, starting in March 2016. Ports for Linux and macOS, developed and published by Feral Interactive, were released in February 2017 and June 2017 respectively. It is the sixth entry in the Hitman series. The game's prologue acts as a prequel to Hitman: Codename 47, while the main game takes place six years after the events of Hitman: Absolution.