Management Buy-Outs and Leveraged Buy-ins

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

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.

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.

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

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

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

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

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

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.

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