Management buyout

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A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company.

1 Management Buyouts
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[edit] Management Buyouts

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.

In many cases the company will already be a private company, but if it is public then the management will take it private.

[edit] 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 maximise the financial benefits they receive from the success they bring to the company by taking the profits for themselves.

[edit] Private Equity Financing

The management of a company will not usually have the money available to buy the company outright themselves. While they could seek to borrow from a bank if the bank will accept the risk, they will commonly look to private equity investors to back their buyout. They will invest money in return for a proportion of the shares in the company, and sometimes also grant a loan to the management.

Private equity backers are likely to have somwhat 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 will be taking 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 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.

[edit] 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 was the subject of a management buyout in 2004 by Tom Singh, the founder of the company who had floated the company in 1998. He was backed by private equity houses Apax and Permira, who own 60% of the company.