What is an Management Buyout (MBO)?
MBO (Management Buyout) and MBI (Management Buy-In) are two common strategies in M&A that involve the acquisition of a company by management teams.
- Management Buyout refers to an M&A transaction in which the existing management team of a company acquires the company from its current owners,
- Management Buy-In involves an external management team acquiring a company.
These strategies are often used when the management team believes they can run the company more efficiently or effectively than the current owners or when they want to take the company in a new direction.
Importance of MBO and MBI in M&A
Management Buyout’s and Buy-In’s can be attractive options for both the management team and the company’s current owners when it comes to M&A transactions.
- For the management team, they can provide an opportunity to own a business and benefit from its success.
- For the current owners, they can provide an exit strategy and an opportunity to realise the value of their investment.
- However, a Management Buyout & Buy-In can also be complex and challenging, requiring careful planning, due diligence, and financing.
- The success of this transaction depends on many factors, including the financial health of the target company, the capabilities of the management team, and the overall market conditions.
Reasons for using Management Buyouts
Why would the current management team try to acquire a company? Unlike Joint Ventures, it involves the people within the business itself obtaining shares through acquisition.
The reasons for pursuing an MBO will vary depending on the specific circumstances and goals of the management team. Let’s look at three main reasons here:
- Entrepreneurial opportunity: The management team may see an opportunity to become owners and entrepreneurs of the business they have been managing. This allows them to take more control over the company and have a greater sense of ownership.
- Strategic vision: The management team may have a strategic vision for the company that they believe can be best achieved through business ownership. By owning the company, they have more control over its direction and can aggressively pursue their strategic goals.
- Financial gain: The management team may see the buyout as an opportunity to gain financially. For example, if they judge that the current share price is low, conduct an MBO, and then after improving the target’s performance, they sell their shares at a much higher price to earn a huge capital gain.
MBO Process
This involves several steps:
- Identify the opportunity: The management team may identify an opportunity to purchase the company from the current owners through a formal sale process or direct negotiations.
- Develop a proposal: The management team would need to develop a proposal that outlines the terms of a buy out, including the purchase price, financing arrangements, and management team structure.
- Negotiate the terms: Once the proposal is developed, the management team should negotiate the terms buy out with the current owners. It could involve multiple rounds of negotiation until a final agreement is reached.
- Secure financing: The management team need to secure financing for the buyout, which may involve working with lenders or investors to raise the necessary capital.
- Conduct due diligence: The management team conducts due diligence on the company with the lenders or investors. They need to assess its financial, operational, and legal situation.
- Finalise the transaction: The transaction can be finalised once the terms have been agreed upon and financing has been secured. It will involve the transfer of ownership and the establishment of the new management team structure.
It’s worth noting that the buyout process could be more straightforward than other types of M&A transactions, such as Divestitures, as the management team is already familiar with the company’s operations and may have an existing relationship with the current owners.
However, significant challenges and complexities can still be involved in the MBO process, particularly around negotiating the terms and securing financing.
Reasons for MBI’s
The motivation for an external management team to pursue a buy-in deal also depends on their individual goals, aspirations, and circumstances. Here are several common reasons for that.
- Growth opportunity: The management team may see the company as a growth opportunity, either through expanding into new markets, increasing market share, or developing new products or services.
- Entrepreneurial opportunity: The management team may have an entrepreneurial mindset and see the MBI as an opportunity to start their own business without the risks of starting a new company from scratch.
- Synergy potential: The management team may see potential synergies between their skills and expertise and the company they seek to acquire, which could create value for both parties.
- Personal financial gain: The management team may be motivated by the potential for personal financial gain through an equity stake in the company or performance-based incentives.
- Career advancement: The management team may see the MBI as an opportunity to advance their career and take on new challenges and responsibilities.
MBI Process – Differences to the MBO Process
The practical management buy-in process is similar to the buyout process, but there are a few key differences.
- Identifying target companies: In an MBO, the management team is already part of the company and knows the business well. In an MBI, the management team must identify and approach potential target companies that align with their skills and expertise.
- Due diligence: In an MBO, the management team likely has a deep understanding of the target company’s financial performance, market position, and potential risks and opportunities. In an MBI, the management team may need to conduct more extensive due diligence to understand the target company fully.
- Post-acquisition integration: In an MBO, the management team is likely already familiar with the company’s culture and operations, making post-acquisition integration easier. In an MBI, the management team may need to work harder to integrate themselves into the target company’s culture and establish themselves as effective leaders.
Overall, the management buy-in process requires a greater level of due diligence than a buyout process and may require more effort to establish a strong leadership position within the target company.
Challenges of MBI
Here is a breakdown of possible challenges or risks the company may face when conducting a management buy-in:
- Establishing credibility – with the target company’s employees, customers, and other stakeholders. The external management team may be perceived as outsiders and may face resistance from employees who are used to the previous management team. The new management team must work hard to establish trust and build relationships with key stakeholders.
- Managing the transition period – between the acquisition and the new management team taking control. During this time, the previous management team may be less motivated to drive the business forward. The external management team may not have full control or authority to make changes. This can create a period of uncertainty and potentially impact the company’s performance.
- Financing – the external management team may need to secure significant external funding to finance the acquisition. It could require extensive negotiations with banks, private equity firms, or other investors and may impact the terms and structure of the deal.
- Complex and time-consuming – they require significant effort and resources from the management team. It could create additional stress and pressure on the team and may impact their ability to manage the company effectively during the acquisition process.
Comparisons of MBO’s to MBI’s
The following are some differences between MBO and MBI:
- Ownership:
- Management Buyout – the existing management team purchases a controlling stake in the company.
- Management Buy-In – an external management team purchases a controlling stake.
- Management:
- Management Buyout – the existing management team remains in place.
- Management Buy-In – an external management team takes control of the company.
- Cultural fit:
- Management Buyout – the management team is already familiar with the company’s culture and operations.
- Management Buy-In – the management team may need to establish new relationships and cultural norms.
- Financing:
- Management Buyout – may require less external financing, as the existing management team may better understand the company’s financial situation.
- Management Buy-In – may require more external financing and collateral.
MBO Case Study
In 2013, Michael Dell, the founder and CEO of Dell Inc., announced his intention to take the company private through a management buyout.
The decision was driven by a desire to transform the company’s business model and focus on high-margin products and services, which was difficult to achieve as a public company facing pressure from shareholders and analysts.
Dell and a group of investors, including private equity firm Silver Lake Partners, offered $13.65 per share to buy out the company’s public shareholders, valuing the company at $24.4 billion.
The deal was highly controversial and faced opposition from activist investors who argued that the offer undervalued the company.
Despite the opposition, the buyout was eventually approved by Dell‘s shareholders in September 2013.
Following the deal’s completion, Dell restructured the company and invested heavily in new product offerings and services.
The company also made a series of strategic acquisitions, including the enterprise software company EMC in 2015, to expand its capabilities and customer base.
The buyout allowed Dell to focus on long-term strategic goals and invest in the company’s future without pressure to meet quarterly earnings targets and other short-term demands of public markets.
The company has since transformed into a leading provider of technology solutions for businesses and consumers, with a strong presence in cloud computing, cybersecurity, and artificial intelligence.
MBI Case Study
One of the famous MBI’s is the acquisition of UK retailer, BHS, by Retail Acquisitions Limited, RAL, in 2015.
RAL was led by Dominic Chappell, a former bankrupt and racing driver, who assembled a team of experienced retail executives to help turn around the struggling department store chain.
The buy-in deal was completed for a nominal fee of £1 and included a commitment to pay off BHS’ £571m pension deficit.
However, the deal quickly turned sour. BHS continued to struggle financially, ultimately collapsing in 2016, leaving thousands of employees without jobs and a pension shortfall for the company’s pension scheme.
The case study highlights the risks associated with buy-in deals, particularly when led by inexperienced or unscrupulous management teams.
It also emphasises the importance of thorough due diligence and risk assessment when considering buy-in opportunities.
Sources and Further Reading
- Dell Technologies Inc, DELL:NYQ summary – FT.com
- Michael Dell’s investment firm is a new force in football finance | Financial Times (ft.com)
- BHS collapse: the key players and what the report says about them | BHS | The Guardian
- Retail Acquisitions, which bought BHS for £1, heads for liquidation | BHS | The Guardian
- BHS – BBC News
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