An Introduction to Corporate Finance: Transactions and Techniques, Second Edition

Chapter 7

MANAGEMENT BUYOUTS

A Management Buyout (MBO) is a specific type of Mergers and Acquisition (M A) transaction. An MBO occurs when a team of managers purchase a company, subsidiary, division or business unit from its existing owner. They typically borrow a large portion of the purchase price. A Management Buyin (MBI) occurs when an external team of managers purchase a company, subsidiary, division or business unit from its existing owner. An Institutional Buyout (IBO) is a buyout instigated and led by a private equity fund (institution). Management is either retained following the acquisition or new managers are brought in on closing.

 

All buyouts typically borrow a large portion of the purchase price. Thus, they are referred to as Leveraged Buyouts (LBOs) in the US. The underlying principle behind all the variants of buyout is the use of the business’s cash flows to pay for the debt incurred to finance the purchase. Over time, the business pays for itself.

 

The US provides the largest buyout market globally, although the European market for deals is rapidly catching up. Within Europe, the UK is the largest market for buyouts by a large order of magnitude (see Figure 7.1), but continental transactions are increasing.

 

As noted above, the purchaser is using the future cash flows of the business to pay down the debt assumed on the buyout which was used to fund the purchase ...