Management Buyout PE Firms have an unlimited life as they manage a sequence of limited-horizon PE Funds as General Partners PE Firm PE-Fund A Portfolio Company A1A2A3…A1A2A3… B1 B2 B3 … C1 C2 … … t + 20t0t0 time (in years) 123456789101112131415161718 … … … 19 Private Equity Governance Structure (2) PE-Fund B Portfolio Company PE-Fund C Portfolio Company
Management Buyout Terminology A buyout can be defined as the purchase of a controlling stake in a business from its owners, typically with the following characteristics Investment companies Investor-led buyout - IBO Financed through a combination of equity and debt Leveraged buyout - LBO Equity participation of current management Management buyout - MBO Introduction of new management Management buy-in - MBI
Management Buyout Typical Features of a Buyout 1.Increased financial leverage 2.Limited investment horizon 3.Standalone acquisition (exception “buy-and-build” transactions) 4.Triggers substantial change in acquired company Restructuring Strategic reorientation Changes in management team Layoffs Divestitures
Management Buyout Mechanics of a Buyout Target „Portfolio Company“ Newco Holding Debt Investors Buyout Firm Equity Debt Buys Equity of
Management Buyout Previous Equity Debt Investors Buyout Firm Equity LBO Debt Previous Debt A consolidated view shows the increased leverage factor Mechanics of a Buyout Previous Debt
Management Buyout A buyout implies substantial change in the role of managers (1)Changing reporting relationships (2)New Incentives – Co-Ownership (3)Debt burden through leverage – Focus on Cash Flow (4)Changing responsibilities – Division Head -> CEO; CEO -> Owner (5)Higher clock-speed – working towards the exit (6)Greater identification with your company (7)Stretch budgets and ambitious targets (8)Need to work with advisors - consultants or GP investment managers The Buyout Manager’s Perspective
Management Buyout Many Household-Name Companies Underwent a Buyout Equity InvestmentYearAcquired Company NameCtryInvesting PE Firm >30002003TRW Automotive, Inc.USBlackstone Group, L.P. >30001989RJR Nabisco, Inc.USKohlberg, Kravis, Roberts & Co. 25001987Burlington Industries, Inc.USMorgan Stanley Private Equity 25002001Yell, Ltd.UKApax Partners & Co. Ventures Ltd 15001998Dr. Pepper/Seven Up Bottling GroupUSCarlyle Group, The 12002002Burger King CorporationUSGoldman, Sachs & Co. 7001998Domino's Pizza LLCUSBain Capital 6002000Italtel SpAITClayton, Dubilier & Rice, Inc. 6002001Picard SurgelesFRCandover Investments PLC 6002002Yellow Pages Group Co.CAOntario Teachers Pension Plan 6001991Lexmark International Group, Inc.USAlliance Capital 5502001Le Meridien HotelsUKTerra Firma Capital Partners Ltd 5002003Eutelsat SAFREURAZEO 4001999Korea First BankSKNewbridge Capital Limited 4002000Fairchild DornierWGAllianz Capital Partners 3502000Seagate Technology Holdings.USAugust Capital Management 3002002Swissport International, Ltd.SZCandover Investments PLC 3002000Kinko's, Inc.USClayton, Dubilier & Rice, Inc.
Management Buyout Levers of value generation Financial Arbitrage (A) Financial Engineering (B) Increasing Operational Effectiveness (C) Increasing Strategic Distinctiveness (D) Reducing Agency Costs (E) Mentoring or Parenting Effects (F) Generation of returns from differences in the valuation applied to a portfolio company between acquisition and divestment independent of changes in the underlying financial performance of the business ("buy low - sell high strategy"). Optimisation of capital structure and minimization of after- tax cost of capital of the portfolio company as consequence of the utilisation of financial knowledge and experience Implementation of measures that enhance overall productivity and effectiveness of operations. The configuration of a company's resources, i.e. how the different available resources are put to work, are being readjusted. Adjustment of the strategic objectives, programs and processes of the portfolio company Decrease of the agency costs that arise of the owner- manager-conflict in the portfolio company Increase in revenues or decrease of cost due to the effect that the portfolio company benefits of being associated with the buyout association Levers of Value Generation in Buyouts
Management Buyout The Evolution of Buyout Value Generation Time 198019902000 Financial Arbitrage, Optimizing Corporate Scope, Financial Engineering Reducing Agency Cost Increasing Operational Effectiveness Value Potential Increasing Strategic Distinctiveness Parenting Effect
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