Management BuyOuts and Leveraged Buyins

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Management Buy-Outs and Leveraged Buy-ins
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Terminology

• MBO Management Buy-Out
• (USA LBO, Leveraged Buy-Out)
• The purchase of a business by its existing
  management team
• MBI Management Buy-In
• Similar, but the Entrepreneurs leading the
  transaction will be from OUTSIDE the company
• Leveraged Using external financing, debt and
  equity

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MBO / MBI s and Entrepreneurship

• Entrepreneurship can involve the purchase of an
  existing business as well as the creation of a
  new one.
• Leading individuals in MBO/MBIs display similar
  characteristics and motivations to those of
  Entrepreneurs generally.

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Why do MBO / MBIs Occur?

• Typically, because of corporate restructuring
  activity, leading the parent company to want to
  divest a subsidiary.
• BOs are the most common method of privatisation
• Or, in the private arena, if an entrepreneur has
  no family to succeed him/her in the business
• Significant levels of business exist in 1999
  this represented 50bn in value
• An increasing proportion is in private companies
  in the UK in 1998 half of all MBO/MBIs were in
  private organisations.

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Why do Management teams do Buy-Outs?

• Competitive reasons
• To acquire additional skills and competencies
• To secure a source of supply, or distribution
• To acquire new technologies
• Plus
• The entrepreneurial realisation of an opportunity
• To speed market entry
• To get assets cheaply
• To acquire an opportunity in the form of an
  enterprise which is not realising its full
  potential

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WHY?

• Opportunity to enhance performance (commonly for
  privatisations
• Retaining the management team gives additional
  stability
• Wealth Creation studies prove that in the short
  term after a buy-out there is substantial
  improvements in profitability, cashflow and
  productivity measures

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MBO vs MBI

• MBI
• Typically involve extensive restructuring
  (traditional accusations of asset stripping)
• Performance generally less strong than MBOs
• Therefore pure MBIs (lacking in knowledge of this
  particular business) are often replaced by the
  hybrid BIMBO

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MBO vs MBI

• MBO
• Recent research shows the importance of
  innovative behaviour, and new product
  development, which may not otherwise have
  happened
• Significantly better performance over 3-5 years
  than comparable non-buy-outs

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Rewards

• Because of the way deals are structured, the
  management team will often be given a larger
  percentage of the equity than is warranted just
  by their investment
• Equity ownership gives increased entrepreneurial
  control and opportunity to develop their own
  strategy

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Costs / Risks

• Cost
• Is the cheapest disposal option for the existing
  owner
• Risk for the Management team
• Do they genuinely have the skills to make it
  work?
• Faced with an MBO opportunity, the management
  often have little idea what is involved (but have
  to learn quickly)
• Very hard work, doesnt always work out
• If external financing is involved (particularly
  VC) the banks will put the management team under
  a lot of pressure, and usually appoint their own
  FD, and non-exec Chairman.

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Sources

• Birley,S. and Muzyaka, D. Mastering
  Entrepreneurship Financial Times Prentice Hall
• Carter S. and Jones-Evans, D. Enterprise and
  Small Business Financial Times Prentice Hall
• Wickham, P.A. Strategic Entrepreneurship Fiancial
  Times Prentice Hall