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Book part
Publication date: 14 July 2015

Kamal Ghosh Ray and Sangita Ghosh Ray

Management buyout (MBO) is a specialized form of acquisition with different motives. Sometimes, there are initiatives taken by the senior management to bailout the firm…

Abstract

Management buyout (MBO) is a specialized form of acquisition with different motives. Sometimes, there are initiatives taken by the senior management to bailout the firm from sickness. The predominant agency theory focuses only on the governance issues in the MBO firms and this theory can be applied to understand how managerial discretion can play vital roles in mitigating value destruction in the post-MBO firm. A CEO-led MBO is presumed to be greed-driven (Bebchuk, L., Cremers, M., & Peyer, U. (2011). The CEO pay slice. Journal of Financial Economics, 102, 199–221.). But a senior management team-led MBO is said to be a socialistic move. By default, MBOs are debt-driven, unless the buying management team is financially affluent, which may be rare, considering the price for the buyout. Private equity (PE) players play a dominant role in providing and or arranging funds in the form of equity and or debt. There is a notion that the PE investors help promote entrepreneurial and modern management practices. The MBO target firm has to ensure returning the entire money back to the sponsors within the shortest possible time out of the operational cash flow. Therefore, various issues like identifying a target firm, sourcing mix of finance, MBO price determination, value creation and value delivery to all stakeholders are all important for understanding the subject. This chapter attempts to construct a robust model for structuring MBO to ensure value fairness to all parties involved in the transaction.

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Advances in Mergers and Acquisitions
Type: Book
ISBN: 978-1-78560-090-6

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Article
Publication date: 1 December 1998

Yehuda Baruch and Sally Woodward

An investigation was undertaken into the important, yet neglected area of the people aspects of management buyout (MBO/MBI). Since prior work suggests that management is…

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Abstract

An investigation was undertaken into the important, yet neglected area of the people aspects of management buyout (MBO/MBI). Since prior work suggests that management is, by far, one of the most crucial factors in the success of MBOs an in‐depth study focused on the characteristics of buyout managers, the culture of management buyout teams, and influences on behaviours during the transaction. This paper reports one part of the study ‐ that relating to management buyout stressors. The aspect of the transaction that generates the most stress was found to be time pressure. Generally, however, the results suggest that stressors, identified by the literature and through focus groups, were not perceived as stressful by this group of buyout managers. Related to this, was the finding that the majority were able to cope with these stressors. Regression analysis indicated that a key factor in manager’s ability to cope was the open/interactive nature of the management team culture.

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Management Decision, vol. 36 no. 10
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 November 2004

Charlotte J. Wright and Liming Guan

Using a matching approach and multivariate logit analysis we determine that management of firms involved in MBOs more frequently chose income increasing accounting…

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1654

Abstract

Using a matching approach and multivariate logit analysis we determine that management of firms involved in MBOs more frequently chose income increasing accounting policies than did a matched sample of non‐MBO firms. The results provide support for the managerial economic incentives hypothesis as a motivation for accounting policy choices. The results of the study are consistent with a number of earlier studies such as Groff and Wright (1989), Hagerman and Zmijewski (1979) and Zmijewski and Hagerman (1981) that also find support for the managerial economic incentives hypothesis for accounting choices. DeAngelo (1986), Perry and Williams (1994) and Wu (1997) find evidence supporting the hypothesis that, in order to reduce the cost of acquiring shares from current stockholders, managers seeking to take firms private make income decreasing discretionary accruals in the period immediately prior to the MBO. In testing this theory DeAngelo (1986), Perry and Williams (1994) and Wu (1997) focus on the overall effect of a pool of business decisions and accruals made in the year immediately prior to the MBO. We theorize that managements’ self‐serving behavior begins far in advance of the actual MBO. The final terms of the MBO are the culmination of numerous actions and choices by management over a period longer than one year. In testing our hypotheses we focus on three specific accounting policy choices made over a period of three years leading up to an MBO and find significant evidence of self‐serving behavior through the use of income increasing accounting policy choices.

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Managerial Finance, vol. 30 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 April 1996

Charlie Weir

Analyses the link between management buyouts (MBOs) and the entrepreneurial process. Argues that, at least initially, a management‐based explanation of entrepreneurial…

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1312

Abstract

Analyses the link between management buyouts (MBOs) and the entrepreneurial process. Argues that, at least initially, a management‐based explanation of entrepreneurial activity is the most appropriate for MBOs. Assesses a number of performance variables to determine the impact of the MBOs. Finds that there is a general improvement in performance suggesting that MBOs provide management with entrepreneurial opportunities which had previously been unavailable to them. Concludes that there is evidence to support the MBO‐entrepreneur link and that MBOs do encourage entrepreneurial activity.

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Management Decision, vol. 34 no. 3
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 July 1991

Abbass F. Alkhafaji

Management′s perception towards buyouts, the impact that variousforms of the buyout are having on the marketplace, and how buyoutpopularity effects the economy are…

Abstract

Management′s perception towards buyouts, the impact that various forms of the buyout are having on the marketplace, and how buyout popularity effects the economy are discussed. The buyout has also become a popular alternative for entrepreneurs, who in the past have founded companies rather than buying existing firms. The advantages that buyouts offer the entrepreneur compared to the traditional approach are also discussed. A survey of managers who have been involved in buyouts is discussed and correlated to current literature involving the new entrepreneur and his/her involvement in the buyout phenomenon.

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Management Decision, vol. 29 no. 7
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 3 July 2009

Arman Kosedag, Jamshid Mehran and Jinhu Qian

The purpose of this paper is to examine the informational asymmetry (informational advantage of managers) in leveraged buyout (LBO) transactions.

Abstract

Purpose

The purpose of this paper is to examine the informational asymmetry (informational advantage of managers) in leveraged buyout (LBO) transactions.

Design/methodology/approach

Unlike previous studies of informational asymmetry in LBOs, this research uses a set of reverse‐LBO and re‐LBO firms. The paper proposes and empirically tests three hypotheses that draw on the informational advantage of managers in LBOs. Specifically, the value gain (VG) realized by the reverse‐LBO firms is compared with that realized by a control sample of firms; the wealth distribution between managers and pre‐buyout shareholders is studied; and, finally, the performance of re‐LBO firms relative to reverse‐LBO firms is evaluated.

Findings

The results do not support the view that managers use buyouts to exploit their informational advantage. Specifically; the performance of LBO firms under the private ownership is comparable to those of matching public firms; the management team's return in a LBO deal is not significantly more than pre‐buyout shareholders’ return; and repeating reverse‐LBO firms (re‐LBOs) do not necessarily perform better than the non‐repeating reverse‐LBO firms.

Originality/value

While reverse‐LBOs have been investigated to some extent in the prior literature, studies on re‐LBOs are quite scant – although these transactions offer a new and interesting avenue to examine the motivations behind LBOs in general. The use of the entire LBO − reverse‐LBO − re‐LBO cycle in testing the informational advantage of managers is a novelty. It is hoped that re‐LBOs will attract the amount of attention they deserve as these firms may offer interesting means to reinvestigate commonly debated theories of corporate finance.

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Managerial Finance, vol. 35 no. 8
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 19 September 2014

Christian Landau

We investigate whether active involvement of private equity firms in their portfolio companies during the holding period of a later-stage private equity investment is…

Abstract

We investigate whether active involvement of private equity firms in their portfolio companies during the holding period of a later-stage private equity investment is related to increased levels in operating performance of these companies. Our analysis of unique survey data on 267 European buyouts and secondary performance data on 29 portfolio companies using partial least squares structural equation modeling indicates that private equity firms, that is, their board representatives, can increase operating performance not only by monitoring the behavior of top managers of portfolio companies, but also by becoming involved in strategic decisions and supporting top managers through the provision of strategic resources. Strategic resources, in particular expertise and networks, provided by private equity firm representatives in the form of financial and strategic involvement are associated with increases in the financial performance and competitive prospects of portfolio companies. Operational involvement, however, is not related to changes in operating performance. In addition to empirical insights into the different types of involvement and their effects, this chapter contributes to the buyout literature by providing support for the suggested broadening of the theoretical discussion beyond the dominant perspective of agency theory through developing and testing a complementary resource-based view of involvement. This allows taking into account not only the monitoring, but also the more entrepreneurial supporting element of involvement by private equity firms.

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Article
Publication date: 1 February 1992

Michael Pogue

Reports on an attempt to launch an unprecedented management buyout,which was seen to have important repercussions for the whole of the£12 billion British buyout industry…

Abstract

Reports on an attempt to launch an unprecedented management buyout, which was seen to have important repercussions for the whole of the £12 billion British buyout industry, and to represent a “test case” regarding the viability and suitability of American‐style leverage deals in Britain. Describes the problems that arose as Magnet plc′s debt increased and its ability to service its interest obligations was undermined.

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Management Decision, vol. 30 no. 2
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 12 March 2021

Timothy A. Kruse

This paper is a clinical examination of the October 2013 Management Buyout of Dell Inc. by founder Michael Dell and Silver Lake Partners for a total consideration of…

Abstract

Purpose

This paper is a clinical examination of the October 2013 Management Buyout of Dell Inc. by founder Michael Dell and Silver Lake Partners for a total consideration of $13.88 per share. The proposed transaction was targeted by shareholders unhappy with the deal price and voting framework. Various shareholders went on to file an appraisal suit. Examining these events yields insights into shareholder rights issues in a major transaction.

Design/methodology/approach

The paper examines events surrounding the acquisition including the negotiation process, go-shop period, shareholder activist demands for a higher price, shareholder voting and the subsequent appraisal trial and appeal.

Findings

Despite suggesting Dell's board fulfilled its fiduciary duties, Delaware Vice Chancellor Travis Laster awarded petitioning shareholders $17.62 per share, a 27% premium to the final deal consideration. This article draws on Laster's decision and research examining topics raised by the surrounding events to argue minority shareholder interests were not sufficiently protected.

Research limitations/implications

The Dell transaction represents only one data point. Moreover, Vice Chancellor Laster's decision was reversed on appeal.

Originality/value

Nevertheless, the paper discusses the nuances surrounding many issues of interest to practitioners involving large going private transactions. It could also be used to illustrate many “real world” perspectives in an advanced corporate finance or mergers and acquisitions class.

Details

Managerial Finance, vol. 47 no. 8
Type: Research Article
ISSN: 0307-4358

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Case study
Publication date: 5 March 2020

Susan White

This case focuses on valuation using various methods to price a firm. Students attempting this case should know the basics of how to value a company using discounted cash…

Abstract

Theoretical basis

This case focuses on valuation using various methods to price a firm. Students attempting this case should know the basics of how to value a company using discounted cash flow, comparable multiples and comparable transactions. Students will need to calculate the weighted average cost of capital using comparable companies and the capital asset pricing model and determine differences in value created by an acquisition vs a leveraged buyout (LBO). The case also discusses qualitative issues in mergers, such as fit between target and acquirer, integration issues, potential high debt from LBO.

Research methodology

This case was library-researched, using Amazon and Whole Foods public filings and business press papers.

Case overview/synopsis

Whole Foods Markets received a buyout offer from Amazon. Whole Foods could solicit offers from other firms, including firms more directly in the grocery business. Whole Foods also considered a management buyout or purchase by a private equity firm. Whole Foods had underperformed, with a falling stock price and reduced profitability. Amazon’s bid was attractive, a premium of about 40 per cent over Whole Foods’ pre-merger stock price. Whole Foods also wanted to consider issues such as culture. Whole Foods’ strategy was to sell organic foods at premium prices, while Amazon was a retail discounter with a largely online business.

Complexity academic level

This case is appropriate for graduate students at the end of their introductory course or for graduate or undergraduate students in a corporate finance elective, particularly a merger/restructuring elective. The case has been used in an advanced undergraduate finance elective, with a team presenting the case to the class, with remaining students in the class required to write case summaries and questions for the presenting group.

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