A2 Objectives and Strategy – Unit 6 Management buyouts (MBO)

Management buyouts The managers of a business buyout the existing shareholders to gain ownership and control of the business or part of it.

Methods of finance for buyouts Managers personal funds Bank loans Investment funds obtained by selling shares to employees The most common is, venture capitalists or private equity firms lend the MBO by taking a stake in the business for a return of about 25-30% over 3-5 years

Reasons for buyouts Large businesses may sell off a small section to raise cash, refocus, or get rid of an unprofitable activity. Management may feel this activity could be run profitably in a different way or more finance Family owned companies may prefer to sell to the existing management hope of maintaining employment and consistency Firm may be in hands of receivers and selling part of business to managers will raise finance to pay creditors

Information sourced from Finance Reason sold

Information sourced from and Finance Reason for sale

Rewards of buyouts Management and employees have more motivation and responsibility No owner manager conflict so objectives may be clearer Less bureaucracy as no head office so no hindering progress Profits will not be diverted to another part of the organisation If successful the company may be floated on stock market or selling shares in a takeover offer

Risks of buyouts Personal losses for new owners if unsuccessful Original owners may have been right to sell if unprofitable. Why will it change? Little access to capital? Considerable rationalisation and job losses may follow, therefore adverse morale

Are buyouts a good thing? 314 MBOs completed in the first half of 2004 – 12 a week – total value of £7.6 billion Some say if managers see value in the firm they should deliver it to the shareholders Workers may be more at risk than if owned by a larger firm Jobs may not have existed if there had been no MBO