Management Buy-Outs and Leveraged Buy-ins

1. Management Buy-Outs and Leveraged Buy-ins

2. 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

3. 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.

4. 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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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, doesn’t 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.

11. 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