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This paper provides an exploratory examination of the growing phenomenon of secondary management buy‐outs and buy‐ins, where an enterprise having initially been bought out…
This paper provides an exploratory examination of the growing phenomenon of secondary management buy‐outs and buy‐ins, where an enterprise having initially been bought out by management is later the subject of a second buy‐out or buy‐in. Such transactions provide a further dimension to the exit opportunities available to venture capital investors and also to the maintenance of independent entrepreneurial businesses. The paper uses large scale data to test propositions relating to the expected differences between secondary buy‐outs and buy‐ins and buy‐outs and buy‐ins in general as well as detailed case study evidence from entrepreneurs and venture capitalists to examine the rationale for such transactions. The quantitative data suggest that secondary buy‐outs and buy‐ins are more likely to involve enterprises in traditional industrial sectors and are significantly more likely to occur a longer time after the initial buy‐out than are trade sales or flotations. The case study evidence reveals that secondary buy‐outs and buy‐ins can arise for various reasons but are rarely the first choice exit route for venture capitalists, though they provide a means by which entrepreneurs can maintain the enterprise’s independent private existence.
In both the United States and Europe there has been a spectacular growth in the number and importance of management buy‐outs since the late 1970s. The typical…
In both the United States and Europe there has been a spectacular growth in the number and importance of management buy‐outs since the late 1970s. The typical characteristics of these deals differ somewhat on either side of the Atlantic in ways which are outlined below. However, in each environment the term “buy‐out” refers essentially to the transfer of ownership of the assets of an existing firm — which may itself be an independent entity or a wholly‐owned subsidiary or division — to a new and especially established group of equity holders which intends to keep at least some of those assets in their former use. In the US buy‐outs have often involved very large asset transfers, indeed multi‐billion dollar deals have been quite frequent. The transaction is typically financed by a limited subscription of equity from specialist venture capitalists and perhaps from the firm's management, together with a very large input of debt capital. The latter has often been in the form of high coupon (so called “junk”) bonds. The characteristically high ratio of debt to equity in buy‐out finance has given rise to their American description as leveraged buy‐outs.
The purpose of this paper is to analyze specific levers of value creation in small and mid-size private equity deals. Private equity firms add value through various types…
The purpose of this paper is to analyze specific levers of value creation in small and mid-size private equity deals. Private equity firms add value through various types of value creation measures in their portfolio firms to achieve abnormal returns. Established literature has shown that value creation measures differ across portfolio firms due to the different development stages of the firm and different buy-out types. Despite the fact that the majority of deals belongs to the small and mid-size segment, prior studies mostly analyzed large private equity buy-outs or mixed samples.
To explore value generation measures in small and mid-size buy-outs, a single case study format was applied studying the carve-out of QUNDIS from Siemens Building Technologie by CAPCELLENCE as an exceptional successfully private equity deal within this segment.
The analysis shows that operational and governance improvements are common value creation measures in all buy-outs. The results suggest a lower leverage for smaller private equity deals indicating that financial engineering is less important. Furthermore, in small and mid-size deals, the strategic focus is growth contrary to downsizing and refocusing in large buy-outs.
Results of a single case study should be generalized cautiously, as they are perceived as less robust compared to empirical methods or multiple case studies. However, this method is appropriate for explorative studies.
The paper is original in exploring certain value creation measures applied by private equity firms in their portfolio companies in the small and mid-size segment.
It is now curious to recall that ten years ago management buy‐outs were infrequent and largely ignored by those not directly involved, (Arnfield et.al., 1981). During the subsequent decade a previously unrecognised oddity has become not merely commonplace but a major force in restructuring the private sector and in privatising public services. In 1989 there were over 500 recorded management buy‐outs (MBO's) and associated deals to a total value of £7.5 billion. In the same year these transactions accounted for 22% of all mergers and acquisitions by value and almost one third by volume. Furthermore, in the latter half of the 1980s the MBO spread to Europe and now appears poised to become a major instrument in dismantling the state industries of Eastern Europe.
Whenever current mortgage rates are substantially higher than previous levels, mortgage lenders may find it attractive to extend to the borrowers a special opportunity to…
Whenever current mortgage rates are substantially higher than previous levels, mortgage lenders may find it attractive to extend to the borrowers a special opportunity to prepay all or part of the mortgages. The purpose of this paper is to identify the important issues in the buy‐out decision, analyze how buy‐back proposals might work using representative mortgages dating back to 1961, and to evaluate how current tax reform proposals will affect the buy‐out process. The empirical analysis demonstrates that only the lenders in the highest tax brackets would find such buy‐out programs profitable, while it is the borrowers in the lowest brackets that would find buy‐outs most attractive. The lack of lenders with high marginal tax rates and the lack of wealth by borrowers with low marginal rates suggests why such buy‐out programs have not been popular in recent years. The analysis of several recently proposed tax plans indicates that buy‐out programs should become more popular in the future, especially at such times as mortgage rates begin to climb again.
It has become increasingly obvious from recent experience that two vital and interrelated factors affecting the eventual success of a management buy‐out (MBO) are respectively the purchase price and the consideration used for the tranfer of ownership. This article examines the types of finance which have become associated with MBOs together with the categories of financial institution involved in providing the finance.
The advantages of pruning corporate portfolios are welcomed in the US, but many British companies still assume that selling subsidiaries will be viewed in terms of failure…
The advantages of pruning corporate portfolios are welcomed in the US, but many British companies still assume that selling subsidiaries will be viewed in terms of failure by the outside world. Evidence suggests, however, that there are rewards in profit trends and enhanced share ratings. The decision to divest may set in motion a management buy‐out.
Provides evidence on the capital search process by entrepreneurial managers, focusing on the means by which managers undertaking management buy‐outs and buy‐ins identify…
Provides evidence on the capital search process by entrepreneurial managers, focusing on the means by which managers undertaking management buy‐outs and buy‐ins identify and select professional intermediaries and venture capitalists. Discusses the marketing implications of the study’s findings.
The practical steps necessary for successful negotiation of a management buy‐out are outlined, discussing preliminary assessment of its inability as a business proposition; the proper way to negotiate the process; and how to bring it to completion.
Management buy‐outs bring about a change in status of the management team from employee to owner. According to the “agency model”, this change in status provides the…
Management buy‐outs bring about a change in status of the management team from employee to owner. According to the “agency model”, this change in status provides the financial incentives necessary to ensure that company performance will improve post‐MBO. The key financial incentive present is that the rewards of better performance now accrue to the management team rather than to the previous owners. The “agency model” argues that having a significant financial stake in a company will militate against discretionary behaviour by the new owners. A sample of small management buy‐outs was analysed in terms of two performance indicators, cash management and profitability. Performance was measured against three benchmarks: prior company performance, the performance of companies of similar size and the performance of the industry average. In general, there is no real evidence of better cash management but there is some evidence of improved profitability. The results therefore, offer limited support for the role of incentives proposed by the agency model.