Management Buyouts Research Articles

Private Equity in Family Firms: A Report on Private Equity Investments in Family Firms Across Europe

The European private equity market (management buy-outs and buy-ins) has grown in prominence over recent years with CMBOR figures showing the numbers of deals conducted rising from 1212 in 1998 to 1436 by the end of 2007. One of the most important features of this market has been the growth in buy-outs of family/private firms from 451 in 1998 to 559 in the past ten years with the combined value of these deals rising from €11.2 billion to €18.3 billion during the same period. This report aims to provide a detailed insight into the issues surrounding buy-outs of family firms using the unique data from the CMBOR database of over 26,000 European buy-outs in addition to three other detailed studies of the family buy-out market.The first section of this report is based on data from the CMBOR database and gives a detailed breakdown of aggregate market statistics for family buy-out in Europe. This includes data such as the value and volume of buy-outs, employee data, deal pricing and structuring data, industry sector analysis as well as the exiting of family firms.Section 2 looks at the problems faced by family firms when dealing with succession. In this part of the report issues covered include those surrounding the way that information flows between vendor and acquirer impact the transaction process and the level of planning undertaken by family owners with regard to succession.In the third part the emphasis is on strategic issues surrounding family firm buy-outs. We examine whether there are distinct differences in the strategy of family businesses post buy-out and relate these to the ownership and governance of the firm pre buy-out.The final part analyses the changes in managerial style which can occur after a family firm has undergone a buy-out. We examine whether there is a move away from the more family orientated stewardship form of management to an approach characterized by more formal governance with mechanisms of planning and control.

Investors Understanding of the ‘Financial and Operational Engineering’ Before Management Buyouts and Post-MBO Performance

During the year prior to management buyout (MBOs) announcements, target managers seem to lower earnings through opportunistic ‘financial and operational engineering’ activities, i.e., abnormally low discretionary accruals, abnormally high discretionary expenses (mainly R&D and advertising expenses), and realizing losses from asset sales. The latter two are real activities and are associated with lower pre-MBO abnormal stock returns, mainly for firms with higher insider ownership, less institutional monitoring, and greater information asymmetry, whereas discretionary accruals are not. The real activities also seem to improve post-MBO operating performance. None of these earnings-reducing activities affects deal completion likelihood, announcement period abnormal returns, or offer premiums for MBOs. Managers do not seem to influence earnings in other years around the MBOs. Our results suggest that these ‘financial and operational engineering’ activities permit target managers to acquire targets “on the cheap” and to earn higher post-MBO investment returns through wealth transfers from pre-MBO shareholders to post-MBO owners instead of value creation.

Private equity and entrepreneurial management in management buy-outs

Critics claim that short-term profit orientation and high deal price strategies of private equity (PE) firms can negatively affect the ability of management buyouts to initiate and sustain entrepreneurial management. This study investigates this claim by comparing effects of majority PE backed and other buy-outs at different levels of financial leverage on post buy-out increases in entrepreneurial management. We propose that PE can be used as an organizational refocusing device that simultaneously increases entrepreneurial and administrative management. We find that majority PE-backed buy-outs significantly increase entrepreneurial management practices. Furthermore, the increased financial leverage positively affects administrative management in management buy-outs. However, the effect of high financial leverage is larger for majority PE-backed buy-outs. These results support the notion that PE firms help buy-out companies develop ambidextrous organizational change: i.e. simultaneously develop entrepreneurial and administrative management practices. The findings have important implications for practitioners and policy makers.

Management Buyouts: Boon Or Bane?

In the present research a theoretical model of corporate divestitures is developed in which the wealth effects for divesting firms shareholders is examined for the case in which the acquirer is an incumbent management team and for the case when the acquirer is an outside buyer. Using an asymmetric information framework in which management enjoys specific utility from continued control of the operations, the model demonstrates that shareholders of the divesting firm should earn higher expected returns when the unit is sold to an incumbent management team rather than to an outside buyer. The subsequent empirical analysis reveals that this is in fact the case. While the announcement day ARs are statistically significant and positive for divestitures to both incumbent management teams and outside buyers, they are significantly larger when the buyer of the unit is the former. A similar and stronger results are observed for the 6 day period (t=-5 through 0) CARs. The policy implications of the theoretical model and empirical results reported above is that the divesting firms shareholders are not harmed, but receive higher returns when the units are purchased by an incumbent management team. Moreover, legislation to prevent or deter MBOs is not in the best interest of shareholders.

MBO Withdrawals and Determinants of Stockholders’ Wealth

Not all firms that intend to go private do so successfully. A number of management buyouts are announced but subsequently withdrawn. It is documented in this study that the stock market reacts negatively to MBO withdrawal announcement. This adverse effect, however, is alleviated in firms where inside directors hold higher proportions of equity ownership and where boards of directors are dominated by independent directors. The results suggest that higher ownership by inside directors helps align management’s and shareholders’ interests whereas outside-dominated boards better monitor management, whose fiduciary duties to shareholders may be compromised by conflicts of interest inherent in management buyouts. Finally, there is evidence that firms that could have taken the offer by another bidder but decided in favor of the MBO, which subsequently fails, suffer more adverse market reactions when the MBO is withdrawn.

Management buyouts and medical market opportunities

Management buyouts and medical market opportunities

Boards, Audit Committees, Earnings Management and Shareholder Returns in MBO's

We relate the agency issues inherent in management buyouts and in earnings management. Income-reducing earnings management occurs prior to management buyouts. When insiders own small amounts of stock, outside monitoring mechanisms such as institutional ownership and Big Six audit firms reduce the level of earnings management. However, when insiders own large amounts of stock, the outside monitors have very little effect and inside monitors become more important. In these cases, smaller and more active audit committees reduce the level of earnings management. MBO firm earnings management does not appear to fool the stock market because the level of earnings management does not influence announcement-period abnormal returns. In a post-hoc examination of these issues in the years following Sarbanes-Oxley, we find that the pre-MBO earnings management becomes insignificant. This change may be due to the improvement in board and audit committee structure that we find in MBO firms following Sarbanes Oxley.

Target Bankruptcy Risk and Its Impact on Going Private Buyout Performance and Exit

Manuscript Type: Empirical Research Question/Issue: What is the impact of bankruptcy risk on whether listed corporations are likely to be bought out by private equity firms and on the subsequent exit, including bankruptcy, of private equity backed public to private buyouts? Research Findings/Insights: Using a sample of 246 UK companies that went from public to private (P2P) company status from 1997 to 2005, we find that companies going private have a significantly higher default probability. Private equity firms sponsoring P2P deals acquire firms with a higher risk of bankruptcy than non-acquired firms that remain public. We find evidence that high receivership risk at going private increases the chance that the target will end up in receivership, but post-P2P bankruptcy likelihood is less when the P2P is a management buyout rather than any other form of buyout. Independent boards of pre-P2P targets promote P2P deals and reduce the chances of bankruptcy after the buyout, suggesting a good corporate governance structure makes a positive contribution to bankruptcy avoidance after going private transactions. Theoretical/Academic Implications: Our finding that P2P deals involve targets with a higher risk of bankruptcy adds to theoretical insights about private equity. In contrast to previous research, it suggests that PE firms are not deterred by the risk of financial distress but consider it a value creating opportunity. Our use of the option pricing framework represents a first and novel attempt at measuring bankruptcy risk and its impact on the ability of private equity firms to achieve effective turnaround. We find a link between better governance of the target pre-P2P and lower bankruptcy risk since where the PE investor inherits a strong governance structure, manifested in independent boards, chances of subsequent bankruptcy are reduced. Similarly, where the P2P acquisition is a management buyout, the probability of bankruptcy, post-P2P, is reduced, suggesting lower informational asymmetries and better alignment of interests between managerial and private equity investors. Although, due to the small number of receivership exits in our sample of P2P firms, the results are not as strong as we would like, a more extended analysis involving a larger sample over a longer period, in particular of firms exiting through bankruptcy is expected to produce stronger results. Our results provide a sufficient basis to warrant such further analysis. Practitioner/Policy Implications: Private equity backed P2Ps of listed corporations with high bankruptcy risk augment the market for corporate control as they provide an alternative purchaser to traditional acquirers. Our finding that high bankruptcy risk at going private increases the chance the target will end up in receivership suggests a need for caution on the part of private equity firms since the turnaround of P2P targets appears to depend on how seriously distressed they are at the P2P stage. Private equity firms therefore need to engage in careful due diligence. Private equity firms need to give attention to the nature of the pre-P2P governance regime when selecting P2P targets, in particular the extent to which better monitoring by independent directors has been in place and where there is greater alignment of interests between managers and LBO sponsors since these contribute to bankruptcy avoidance. For listed corporations, our findings suggest that strengthening of independent boards may contribute to timely decisions to sell troubled corporations.

Exits, Performance, and Late Stage Private Equity: the Case of UK Management Buy‐outs

Abstract Using a hand‐collected dataset of 1,225 buy‐outs, we examine post buy‐out and post exit long term abnormal operating performance of UK management buy‐outs, during the period 1980–2009. Our univariate and panel data analysis of post buy‐out performance conclusively show positive changes in output. We also find strong evidence for improvements in employment and output and a lack of significant changes in efficiency and profitability following initial public offerings (IPO) exits. IPOs from the main London Stock Exchange (LSE) market outperform their counterparts from the Alternative Investment Market (AIM) only in terms of changes in output. For secondary management buy outs (SMBOs), performance declines during the first buy‐out but in the second buy‐out performance stabilises until year three, after which profitability and efficiency fall while employment increases. Although private equity (PE) backed buy‐outs do not exhibit either post buy‐out or post exit underperformance, they fail to over‐perform their non‐PE backed counterparts. In the subsample of buy‐outs exiting via IPOs on the AIM, PE firms do not outperform non‐PE buy‐outs. Our findings highlight the importance of tracing the overall performance of buy‐outs over a longer period and controlling for sample selection bias related to the provision of PE backing.

MBO Financing Risks And Managers' Use Of Anti-Takeover Measures

In a management buyout (MBO) offer, managers have an incentive to offer stockholders a price low enough to compensate them for the risks of increasing their equity ownership in a highly leve- raged buyout firm. As these risks increase, managers are more likely to combine their offer with an anti-takeover measure. These measures do not protect a low offer, but do result in a higher takeover price when managers are unwilling to match a competitive offer. Such measures, then, benefit shareholders.

Yutong Bus, China: management buy-out

Subject area Corporate governance, privatisation. Study level/applicability Masters level programmes, with particular focus on corporate governance, privatisation, and organizational development. Case overview Yutong Bus is a real and highly publicized case in China. It is a listed company carved out from a state-owned enterprise (SOE), Yutong Group. Later the management successfully bought out Yutong Group and thus indirectly controlled the company. The deal transformed Yutong Group from a SOE to a private company. The management was innovative in pushing through the management buy-out (MBO), but politically, it created a public outcry about the loss of state-owned assets. The key issue here is the selection of state owned enterprises suitable for privatization and, more importantly, the determination of selling price. In China “the market for corporate control is still lagging behind” (Shanghai Stock Exchange). Expected learning outcomes Students would be expected to gain an understanding of recent economic reform in China, Corporate Governance in the Chinese context and wider issues associated with privatization and MBOs. Supplementary materials Teaching note.

Do Investors Understand Accrual and Real Earnings Management Before Management Buyouts?

Do Investors Understand Accrual and Real Earnings Management Before Management Buyouts?

Strategic changes in family firms post management buyout: Ownership and governance issues

When no suitable family successor can be identified, private family firm owners may select a management buyout (MBO) or a management buyin (MBI) exit route. After a private equity backed MBO/I, new owners may select strategies that encourage superior firm performance. We explore the strategic orientation of former private family firms pre- and post-MBO/Is. Ownership and governance issues are considered. Following insights from agency and stewardship theory, several hypotheses are derived and tested with reference to a representative sample of 104 MBO/ Is located across Europe. Univariate analysis suggests greater scope for efficiency gains and growth in cases where the founder was present at time of buyout, where no managers with equity stakes or non-executive directors were employed pre-buyout, and where the private equity investor and management were involved in succession planning. Multinomial logistic regression suggests efficiency gains in firms with no equity holding non-family managers pre-buyout. Conclusions and implications are discussed.

Chinese Management Buyouts and Board Transformation

We assess the extent to which Chinese MBOs of listed corporations enable a balance to be achieved between facilitating growth and supporting the interests of minority shareholders other than the buyout organization. Using novel, hand-collected data from 19 MBOs of listed corporations in China, a matched sample of 19 non-MBOs and the population of listed corporations, we examine the extent to which boards of directors are changed to bring in executive and outside directors with the skills to grow as well as restructure a business. We also examine the extent to which outside directors become involved in actions to develop the business rather than actions related to fostering the interests of all shareholders. We find in fact little evidence that outside board members have the skills to add value to the MBO firms. Boards appear to focus mainly on related-party transactions with some more limited attention to growth strategies. Outside directors do not seem to openly disagree with incumbent managers on the disclosure of their actions but may express their views and exert pressure behind the scenes.

Form Over Substance? The Value of Corporate Process and Management Buy-Outs

We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MBOs and the role of process. We find that there is value in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence of special committees. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results allow for a cautious approach and more rigorous application of current Delaware law to provide that courts more vigorously scrutinize MBO transactions. They also inform the proper standard for review of other forms of takeovers with explicit agency/principal conflicts, including freeze-outs.

Partner Selection Decisions in Interfirm Collaborations: The Paradox of Relational Embeddedness

abstractBy combining insights from relational network theory and agency theory we identify the boundary conditions to the embeddedness approach to partner selection decisions in interfirm collaborations. Employing a longitudinal dataset comprising the investment syndicates for the population of UK management buyouts between 1993 and 2003, we find that relational embeddedness is less important for selecting partners when agency risks are low, allowing firms to expand their networks. Furthermore, reputational capital may act as a partial substitute for relational embeddedness, again permitting firms to expand their networks. Our findings enhance understanding of the boundary conditions associated with the relational network approach to partner selections and network behaviour.

Form Over Substance? Management Buy-Outs and the Value of Corporate Process

We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MBOs and the role of process. We find that there is “value” in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence of special committees of independent directors. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results support a cautious approach and more rigorous application of current Delaware law to provide that courts vigorously scrutinize MBO transactions. They also inform the proper standard for review of other takeovers with explicit agency/principal conflicts, including freeze-outs.

Is Entrepreneur–Politician Alliance Sustainable During Transition? The Case of Management Buyouts in China

AbstractThis article explores the dynamic interactions between entrepreneurs and politicians in transitional China through the lens of management buyouts. Specifically, we identify two contrasting outcomes of entrepreneur–politician alliances: privatization buyouts by entrepreneurs implying sustainable original alliances and failed management buyouts implying the collapse of the original alliances. Drawing on the rent appropriation literature, we treat Chinese management buyouts as bargaining, clarification, and redistribution of organizational rent between entrepreneurs and the government agencies represented by local politicians. We further develop a model of entrepreneur–politician bargaining that identifies the determinants of varying rent bargaining and management buyout outcomes.

Is Entrepreneur-Politician Alliance Sustainable During Transition? The Case of Management Buyouts in China

This paper explores the dynamic interactions between entrepreneurs and politicians in transition China through an unconventional lens of management buyouts (MBOs). Specifically we identify two contrasting outcomes of entrepreneur-politician alliances: Privatization buyouts by entrepreneurs and failed MBOs implying the collapse of the original alliance. Drawing on the rent appropriation literature, we treat Chinese MBOs as a bargaining, clarification, and redistribution of organizational rent between entrepreneurs and politicians, and further develop a model of entreprepreneur-politician bargaining that identifies the determinants of varying rent bargaining (MBO) outcomes.

Form Over Substance? The Value of Corporate Process and Management Buy-Outs

We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MB Os and the role of process. We find that there is value in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence ofspecial committees. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results allow for a cautious approach and more rigorous application of current Delaware law to provide that courts more vigorously scrutinize MBO transactions. They also inform the proper standard for review of other forms of takeovers with explicit agency/principal conflicts, including freeze-outs.