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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 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 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 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.

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.

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.

This exploratory study aims to provide fresh insights into the ownership transfer of private family firms through internal management buy‐out (MBO) and external management buy‐in (MBI) succession routes. The paper aims to explore if flows of information impact the succession planning process and if the nature of succession planning impacts the business sale negotiation process relating to family firms that select MBO/MBI succession routes.

Guided by insights from agency theory and theories relating to information asymmetries and negotiation behaviour six hypotheses were derived. Private family firms that had received venture capital and the MBO/I deals had been completed between 1994 and 2003 were identified. A structured survey was administered to 117 senior members of acquiring MBO/I management teams after the deal had been completed in several European countries. Non‐parametric chi‐square tests and Mann‐Whitney “U” tests were used to test the presented hypotheses.

Evidence highlights the importance of information sharing and that the family owner(s) may not always be in the strongest position. MBOs reported lower information asymmetry. Also, lower information asymmetry was reported when vendors and management were involved in succession planning. Internal managers with greater access to information were found to influence the negotiation process and determine who is more likely to benefit from the price to be paid for the firm. A mutually agreed price was less likely when management controlled information and when personal equity providers (PEP) were involved in the process supporting the interests of the MBO/I team.

Family firm owners need to plan for succession planning. Vendors of family firms need to leverage external professional advice when negotiating the sale of their ventures to ensure “family agendas” are protected.

This study has extended the conceptual work of Howorth et al. surrounding the succession of family firms through MBOs and MBIs. Rather than relying on case study evidence alone, cross‐sectional survey evidence was explored within a univariate statistical framework to explore gaps in the knowledge base relating to succession planning and business sale negotiation behaviour.

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.

Corporate governance, privatisation.

Masters level programmes, with particular focus on corporate governance, privatisation, and organizational development.

Yutong Bus is a real and highly publicized case in China. It is a listed company carved out from a state-owned enterprise (SOE), Yutong Group. Later the management successfully bought out Yutong Group and thus indirectly controlled the company. The deal transformed Yutong Group from a SOE to a private company. The management was innovative in pushing through the management buy-out (MBO), but politically, it created a public outcry about the loss of state-owned assets. The key issue here is the selection of state owned enterprises suitable for privatization and, more importantly, the determination of selling price. In China “the market for corporate control is still lagging behind” (Shanghai Stock Exchange).

Students would be expected to gain an understanding of recent economic reform in China, Corporate Governance in the Chinese context and wider issues associated with privatization and MBOs.

Teaching note.

Seeks to investigate whether the financial characteristics of leveraged buy‐out (LBO) targets differ from those of firms that have not undergone an LBO before the deal. Specifically, to examine the free cash flows (FCFs), income taxes, capital intensity, business risk, profitability, financial structure and asset characteristics of 175 French LBO targets that are mainly privately held and rather small companies, between 1996 and 2002.

Predictions derive from the FCF and the tax savings hypotheses, and from the criteria used by LBO firms in their acquisition rationale. Tests were conducted of differences between LBO targets and control companies and logit regressions run.

Results show that LBO targets are less indebted, have more liquid (financial) assets, and exhibit higher business risk than their industry counterparts. A distinction between LOBs according to the vendor type shows that independent companies are smaller, more profitable, and have higher tax income levels, whereas former subsidiaries or divisions of groups are less profitable, and have more financial assets than their industry counterparts. Logit regressions suggest that LBOs of smaller independent targets that LBOs of smaller independent targets fit fiscal and succession motives, whereas LBOs of former subsidiaries address management issues.

The likelihood of an LBO is related to accounting ratios only. Further research could include other financial or strategic variables in the models.

The unexpected risky profile of targets has implications for LBO firms.

A new result is the risky profile of LBO targets prior to the deal. This could help to explain the underperformance puzzle after the deal already emphasized on the French market.