Definition of management buy-out (MBO)

A management buy-out (MBO) is an acquisition in which the acquiring group is led by the company's own management and executives.

The key difference between an MBO and a regular acquisition (takeover) is that the company is bought by its own management rather than by another company or by a group of outside investors.

Managers are rarely wealthy enough to buy the company on their own and additional funds may have to be raised, usually under the form of debt financing. MBOs therefore often take the form of a leveraged buy-out (LBO), where a large part of the purchase price is debt financed and the remaining equity is privately held by a small group of investors.

The MBO may also be financed by private equity investors who receive shares in the new company in return for their money.

What do managers and shareholders gain from agreeing to an MBO? A public company that is acquired by its management is taken private. Obvious gains from going private are the savings from reduced registration and listing costs, less stringent regulatory and disclosure requirements, and the elimination of shareholder servicing costs. These savings can be significant for smaller groups. A second benefit is the reduction in the management-shareholder agency costs. If managers own the company then this increases their incentives to work harder and to make decisions that are in the long term interest of the firm. Finally, the substantial amount of debt often loaded upon the firm as a result of a MBO forces managers to make the firm leaner and more efficient.

One important consideration regarding MBOs is that managers usually have more information about a company than outside shareholders. This could lead to a conflict of interests where managers try to buy the company when they have inside information that indicates that the future of the company is better than previously expected. In other words, managers may try to buy the company on the cheap when it is undervalued. Outside shareholders know, however, that managers have an informational advantage and therefore demand a higher price in order to sell their ownership. Managers may therefore have to share some of the gains from the MBO with outside shareholders.

Example

Menzies Hotel was bought in 2011 by its management after the parent company, Piccadilly Hotels, went into administration. The sale resulted in a financial restructuring of Menzies Hotels, in agreement with its lender (Lloyds Banking Group), under a new company called Cordial Hotels. The company is now majority-owned by the management team.[1]

FT Articles & Analysis

No articles are associated with this term

Related Terms