Question

Briefly discuss the following types of private equity transaction, management buy-out (MBO), management buy-in (MBI) and institutional buy-out (IBO)

Answer 1

1. Management Buy-out:

Introduction

An Management Buy-out is a type of transaction where the assets and operations of the company's business is purchased or acquired by it's own employees or teams involved in running it. This could possible by purchasing majority of shares or entire stake of the division/ business of the company.

Why is it needed?

At times the organisation would like to move out of certain business that they own at present. Selling it to the outside management could be more costly and at the same time, deriving the true value from that division will be delayed as the outside management may take time to get completely acquainted with the division.

Advantages

- Boosts the morale of employees as they get benefited as owners instead of just working as employees.

- It is comparatively cheaper than raising equity and debt for such 'exit' transaction.

- Company can focus more on the core business rather than diverting their attention to non-core business.

Disadvantage

There one big problem with this type of transaction, It is 'Conflict of Interest'. As the new management team takes the control of the division of the company, they need to undergo from an intrapreneur (employee) to an entrepreneur in order to manage the business. There can be difference of opinion within the company management and the new management of the business.

2. Management Buy-in:

Introduction

Management Buy-in is a type corporate transaction wherein the management team which is outside the company, purchases the business of the company, or the entire stake of the company itself. Management Buy-in is undertaken when an the management external in nature to the company finds a potential in a company business which is yet to be unlocked.

Why is it needed?

Management Buy-in is beneficial for both the seller and the buyer. Unlike Management Buy-out, where an experienced and tailored management teams can have a strong influence over the purchasing price, Management Buy-in includes buyers who bring their resources for company's growth.

Advantages

- Management Buy-in is often seen as Value investment as the company's business may be undervalued at the time of acquiring. But the value can be unlocked later and the business could be sold at a higher price.

- Private Equity usually opts for this type of acquisition wherein they replace or add their own representatives to overlook the activities of the business to ensure the that the objectivity of profitability and growth are being met.

- Management Buy-in can also be a change management. It brings a number of new external factors that can help a business to grow like experiences, contacts, technology integration, revised policies and practices.

Disadvantages

Changing management may be attractive to all employees currently working in the company. Furthermore replacing management with new directors managers may hurt employees morale.

3. Institutional Buy-out:

Introduction

Institutional Buy-out includes firms such as venture capital and private equity to acquire the stakes of the business. Compared to the management buy-out and management buy-in, Institutional but-out is more hostile in nature. This is because the changes brought by the acquiring company are more radical in nature and it may often include replacing the current management with new managers.

Why is it needed?

Institutional Buy-out is undertaken by a more professionally managed organisation which specialize in that particular business or possess resources that can act as a catalyst for the target company. This type of transaction takes place keeping various parameters in mind like the current cash generation, current leverage and capital infusion cost.

Advantages

- The value of the business is greatly improved as it is now managed by the a venture capital or a private equity firm.

- Changes in management many-a-times removes bottlenecks that previously hindered with operations thereby affecting profitability.

Disadvantages

The repelling effect of employee is seen here the most as this a hostile move by the acquiring firm. Even the management which may be laid off by being offered equity in the company however there may be some management key to the business that may be removed by the new firm.