•A buyout is an investment transaction by which an entire company or a controlling part of the stock of a company is sold. A firm "buys out" a company to take control of it. A buyout can take the form of a leveraged buyout, a venture capital buyout or a management buyout. Where the company being bought out is a public company, a buyout is often called a "going private" transaction.

Buyout

LEVERAGED BUYOUT

• LBO is a financing technique of purchasing a private company with the help of borrowed or debt capital. The leveraged buy outs are cash transactions in nature where cash is borrowed by the acquiring firm and the debt financing represents 50% or more of the purchase price. Generally the tangible assets of the target company are used as the collateral security for the loans borrowed by acquiring firm in order to finance the acquisition.

MANAGEMENT BUYOUT

• Organic growth potential. Financial investors generally are more interested in companies having a sustainable differential advantage in the marketplace and that operate in a growing industry, as opposed to ‘me too’ types of businesses and those in declining industries.

• Ability to leverage. By using debt to finance a portion of the purchase price, the return on equity is higher (as is the risk). The debt capacity of a company is a function of the nature and quantum of its underlying tangible assets and its ability to generate cash flows to service debt

THE ESSENTIAL COMPONENTS OF AN MBO

• Exit strategy opportunities. Financial investors generally have a 3 to 7 year time horizon. They seek companies that can either be sold to a strategic buyer or are believed to be good candidates for an initial public offering. These avenues offer ‘exit multiple expansion’, which means that the effective price multiple paid on exit is expected to be richer than that paid on acquisition

REASONS FOR MBO

• Non-Core Divestments and Efficiency Improvements:An organization focusing on efficiency improvements or consolidation of its core activities will often look to divest business units that are a financial burden or represent a divergence from a new strategy. In these situations, a MBO can provide a smooth and efficient transaction that avoids the inconvenience of finding external buyers or the need to release sensitive organizational data.

•Management Incentivisation: Management faces constant pressure to maximise profits and implement new growth strategies. However, it is often recognised that linking managerial compensation to substantial direct equity ownership can provide a powerful incentive. A MBO can be an effective way to implement such an incentive structure.

•Insolvency :In the event that the company has become insolvent and a receiver or administrator has been appointed, current management may represent a viable acquirer for specific business units. However, appropriate financial backing will often be required in this type of buy out.•Succession :An MBO can provide a feasible solution to business succession issues such as the retirement of a key founder or partner. The experience of the current management team in running the business alongside the outgoing owner make them an attractive MBO candidate that will help ensure a smooth transition and minimal disruption to business growth plans.

•Regulatory Requirement :In some circumstances, the Australian Competition & Consumer Commission may force a company to divest part of its assets, business units, or a portion of a recent acquisition in the interests of maintaining competition. In this situation, a MBO may offer a cost effective means of compliance. •Bundled Businesses: In some circumstances a company may acquire a bundle of businesses, but may have no intention of operating all aspects of each business. A MBO strategy can be adopted for the divestment of the undesirable components of a bundled acquisition.

•Aspiration Divergence :At a given point in a company’s life cycle, current managers and owners may hold different opinions as to the future direction the business. A properly planned and executed MBO can therefore offer a viable resolution to major business disagreements

ROLE OF FINANCIAL ADVISERS

• advising on the format and content of the business plan;• choosing 3 or 4 prospective equity investors most likely to be keen

to invest in the type of business and size of deal;• seeking a cost indemnity and a period of exclusivity from the

owners;• negotiating the best possible equity deal for management from the

preferred equity investor;• working with the equity investor to negotiate the lowest possible

purchase price and most advantageous deal structure from the owners;

• introducing the management team to appropriate legal firms with proven experience of management buy-outs.

Preparation MBO-strategy,offer

Letter of Intent Due diligenceexaminations

Closing

• Feasibility examination

• Preparation of a business plan (3-5 years)

• Company valuation

• Analysis and preparation of the MBO structure (from buyer or sellers

• Offer

• Defining the transaction structure

• Financing discussions

• LOI

• Due diligence (legal, tax, finance)

• Preparation of the final financing

• Contract preparation

• Final contractual negotiations

• Closing: transaction concluded

~ 2 months ~ 1 month 1-2 months 1-2 months 1 month

• Principle decision (management, private equity partner)

• Indicative offer• Exclusivity agreement with partners board (time limited)

• Binding offer

• Contracts • Closing

MBO PROCESS

STEP 1

•Business Plan Development The development of a comprehensive business plan should include the company’s financial projections, the strategy the team will implement to achieve these projections, the level of capital investment required to implement the strategy and a clear definition of success. It is also important that the buy out team have a thorough understanding of the market forces and economic variables that may influences future business prosperity. An estimated timeframe for the purchase negotiations and completion of the buy out should also be established.

STEP 2

•Selection of a Financial Supporter : The individual managers involved in a buy out will often lack the financial capacity to fund the transaction on their own. Frequently, the buy out team will seek backing from an equity partner such as a private equity firm. Careful planning and selection of an appropriate equity partner is critical to the success of any MBO team

STEP 3

•Conducting Due Diligence : While a MBO team will have greater knowledge of a business than an external acquirer, it is still important that a proper due diligence is undertaken. The individual managers involved in the MBO will already have access to certain types of confidential information. However, it is important that any buy out team has access to all relevant information and can assess the full situation to ensure the validity of estimates and plans.

STEP 4

•Debt Funding : Identifying the types of debt funding required and securing the debt is an important next step in the buy out process. The most common form of debt funding for a MBO is Senior Debt, however a combination of Mezzanine Funding and possibly Hybrid Capital can be arranged in conjunction with Senior Debt

STEP 5

•Documentation : The final step of the MBO process is to create and sign off on the legal documentation between the parties, which outlines the relationship between all shareholders of the restructured entity. This process ordinarily commences around the time of the Due Diligence process although the final contracts will reflect all information discovered during Due Diligence.

EXAMPLES

•A classic example of an MBO involved Springfield Remanufacturing Corporation, 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 it in 1998. He was backed by private equity houses Apax and Permira, who now own 60% of the company. An earlier example of this in the UK was the management buyout of Virgin Interactive from Viacom which was led by Mark Dyne.

• Private equity fund Blackstone has concluded India’s largest management buyout deal till now. The US fund has backed the management of Intelenet Global, the BPO promoted by HDFC and Barclays Bank Plc, to buy out the company reportedly for $200 million. The private equity fund will retain 80 per cent, while the management will hold 20 per cent of the company. Around 300-400 employees in the senior management of Intelenet will become shareholders in the firm.

• The management buyout of NBFC Capital First is the largest in India. t took a little over three months of negotiations for private equity firm Warburg Pincus to pick up a 70 per cent stake in financial services company capital first (it was earlier known as future capital holdings). It is the largest management buyout of a listed financial services company in India.

EXAMPLE

WHY IT MATTERS

•The primary difference between a management buyout and any other type of acquisition is the inherent knowledge and expertise of the buyers compared with the sellers. The buyers (management) will usually have more knowledge of the company and its prospects than the sellers. In most scenarios, the sellers rely on the input of management regarding the future of the company to help set the selling price. Here, the advisors become the buyers. In this scenario, the sellers are at a clear disadvantage.

•For instance, the management, as buyers, may exploit their advantageous position by manipulating the stock price through certain types of stock sales so that they will achieve a lower buying price. They may also try to lower the purchase price of the company by taking aggressive write-offs in order to show less net income in the period leading up to the purchase.  The sellers therefore must use caution with regard to the buyers in an MBO.

Likewise, the management as buyers must also exercise caution with regard to the financiers they bring to assist with the purchase. Venture capitalists, for example, may have different goals than the company’s management team regarding the expected timing and nature of the return on investment (ROI) in the company. In a case where a venture capitalist investor has gained a large enough stake in an MBO, the management who purchased the company may have less control over how to actually manage the company