Management Buyouts Research Articles

Conflicts of Interest of Directors and Officers in Management Buyouts (MBOs) and their Regulation

Conflicts of Interest of Directors and Officers in Management Buyouts (MBOs) and their Regulation

Hands in the Cookie Jar? The Case of Management Buyouts

This paper investigates the effects of managerial ownership on shareholder wealth gains in management buyouts to study whether target managers expropriate public shareholder interests when they buy out a firm. We find that the transaction premiums are negatively associated with the buyout managers' stock holdings, but not with their option holdings. This evidence indicates that acquiring managers, using their corporate power associated with their stock holdings, pursue their own interests at the expense of public shareholders, and that their interest in the post-buyout firm dominates their interest associated with their options. We also find that the transaction premiums are not associated with the non-buyout managers' stock and option holdings. JEL classification: G34 G14

Profiting from Gaizhi: Management Buyout During China's Privatization

During the late 1990s, China introduced the gaizhi process for privatizing state-owned firms. Under gaizhi, managers could acquire their firms at a price that was based on recent profitability. Systematic analysis of longitudinal data reveals the following: (1) There is a statistically significant 4 percent decrease in net margin relative to trend in the one year period immediately prior to privatization; (2) There is no statistically meaningful difference in net margin in the period after privatization relative to the period one year or more before privatization. These findings suggest that managers intentionally suppressed the performance of their firms so as to acquire them at less than fair value. We test and reject other, more innocuous explanations for this profit pattern.

Research on the Exit Routes of Chinese Private Equity Funds

Up to the present, private equity (PE) is a relatively new financial instrument in China. Due to the rapid growth of Chinese economy, a great number of domestic and overseas capitals had participated in PE business in recent years. PE usually claims back the funds from the investment after earning satisfactory profits. The primary exit routes for PE include IPO, write-offs, Management Buyout (MBO), repayment of shares or loans and sold to other venture capitals or financial institutions. Among these strategies, IPO has always been the dominant exit routes for PE. Nonetheless, PE faced a few obstacles withdraw the funds from investment through IPO in China lately, such as the bad performance of domestic stock market and the tight monetary policy. Accordingly, PE should consider further the effectiveness of these routes when reclaiming the funds from the investee companies.

Family Firm Buy-Outs, Private Equity and Strategic Change

Management buy-outs (MBO) and buy-ins (MBI) represent an important succession option in family firms. They thus also provide an important deal source for private equity firms. Yet, while much attention in the private equity and buy-out market has been upon large public to private transactions, the family buy-out part of the market is not well-understood. In light of these issues, the purpose of this article is twofold: We provide an overview of developments in the family firm buy-out market. Specifically, we examine trends in the number and value of deals, deal sizes, share of the total buy-out market, employment and the role of private equity. We use CMBOR’s unique database comprising the population of 30,000 European buy-outs as the source for this analysis. We undertake a detailed study of strategic changes in family firms as a result of a buy-out. Specifically, we examine whether changes in the strategy of former private family firms affected by the ownership and governance of the firm before the buy-out. These issues are examined using a novel hand-collected representative questionnaire survey of 104 private family firms across Europe which had a buy-out funded by private equity between 1994 and 2003.

Divestment management buy-outs in Japan: performance, governance, and business strategies of seller firms

This study has examined cases of management buyouts (MBOs), which have been increasing rapidly in number since around 2000. First, an overview of MBO practices is provided, indicating the beginning of an increase in divestment-type MBOs as a new means to implement corporate restructuring. Subsequently, the factors used by Japanese companies to decide on whether to pursue divestment MBO were analyzed while particularly addressing the parent companies––the sellers of the business units. Results suggest the following factors leading to the parent company divestment of subsidiaries and business units through MBOs: 1) poor performance of the business of the parent company, 2) high debt-to-asset ratio (debt reliance) of the parent company, 3) wide diversification of parent company operations, and 4) active reorganization of the parent company’s corporate group. The structure of corporate governance also affects MBO trends, indicating that 5) companies for which shareholding ratios of institutional investors and directors are high are more likely to implement a divestment MBO. Conversely, 6) companies that are protected by cross-shareholdings are less likely to implement corporate restructuring.

Effort of Private Equity in Management Buyouts

Effort of Private Equity in Management Buyouts

The economic impact of private equity: what we know and what we would like to know

Private equity and management buyouts have been the subject of considerable controversy. There have been recent calls for more systematic evidence on the impact of private equity and buyouts. Yet there is already an extensive body of scientific evidence stretching back over the past two decades that provides a platform for understanding the current context. This article summarises what we know about private equity from a comprehensive review of approximately 100 studies from around the world under the following headings: the returns to investors; profitability and productivity; the drivers of effects on profitability and productivity; the impact on employment and wages; growth and investment strategies; the extent to which high leverage is associated with failure; the generation of gains from asset disposals (asset stripping); the reselling of assets within short periods of time (asset flipping); and whether the effects persist after private equity firms have exited. This scientific evidence indicates that private equity and buyouts bring particularly important economic and social benefits. What we would like to know about private equity and buyouts is discussed under five broad headings: the difference between the second wave of deals and the first wave; the nature of the fund and its impact on returns; the distinction between secondary and primary buyouts; the failure rate of buyouts; and the tax implications. Implications for policy and practitioners are also discussed.

Do Target CEO's Sell Out Their Shareholders to Keep Their Job in a Merger?

CEOs have a potential conflict of interest when their company is acquired: They can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

Do Target CEOs Sell Out Their Shareholders to Keep Their Job in a Merger?

CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for 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 buy-in (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. We utilize a unique hand-collected 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.

PICKING UP THE PIECES

IN 2004, when suppliers of active pharmaceutical ingredients (APIs) were several years into a prolonged slump, the management of a generic API plant operated by BASF in Cramlington, England, sensed it was the right time to launch a new fine chemicals business. The group acquired the site through a management buyout and formed Aesica. By 2006, the contract API sector had started to rebound, fueled in part by drug companies closing or selling their manufacturing plants and shifting production to third-party suppliers. Aesica took advantage of this trend and acquired two other sites in England—an API plant from Merck & Co. and an API and formulation facility from Abbott Laboratories. Other pharmaceutical chemical companies have acquired unwanted big pharma API plants, but Aesica is the first contract manufacturer built solely out of discarded drug industry assets. Now it has set out on a potentially more difficult task: creating the relationships with major drug companies ...

Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts

We analyze the effect of external financing concerns on managers' financial reporting behavior prior to management buyouts (MBOs). Prior studies hypothesize that managers intending to undertake an MBO have an incentive to manage earnings downward to reduce the purchase price. We hypothesize that managers also face a conflicting reporting incentive associated with their efforts to obtain external financing for the MBO and to lower their financing cost. Consistent with our hypothesis, we find that managers who rely the most on external funds to finance their MBOs tend to report less negative abnormal accrual prior to the MBOs. In addition, the relation between external financing and abnormal accruals is tempered when there are more fixed assets that can serve as collateral for debt financing.

Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts

We analyze the effect of external financing concerns on managers' financial reporting behavior prior to management buyouts (MBOs). Prior studies hypothesize that managers intending to undertake an MBO have an incentive to manage earnings downward to reduce the purchase price. We hypothesize that managers also face a conflicting reporting incentive associated with their efforts to obtain external financing for the MBO and to lower their financing cost. Consistent with our hypothesis, we find that managers who rely the most on external funds to finance their MBOs tend to report less negative abnormal accruals prior to the MBOs. In addition, the relation between external financing and abnormal accruals is tempered when there are more fixed assets that can serve as collateral for debt financing.

Do Private Equity Consortiums Facilitate Collusion in Takeover Bidding?

This paper extends the corporate governance literature such as Alchian and Demsetz (1972) by analyzing the use of special committees of disinterested directors by target firms during corporate takeovers. Our sample spans post Sarbanes-Oxley from 2003 through 2007, under which boards of directors are subject to increased scrutiny and additional regulatory mandates. This period is also characterized by a high level of management buyout activity that can exacerbate conflicts. Our results show that special committee use is positively related to conflicts and negatively related to factors and situations where insider knowledge is particularly valuable. Moreover, the propensity to form a committee is negatively related to the board’s overall independence; hence special committees substitute for the monitoring not found in the overall board composition. Special committees, on average, are formed well in advance of the merger agreement, employ additional financial advisors, and are more likely to run an auction process. Target returns in deals with special committees are no different than deals without special committees. The evidence indicates that special committees enable target boards to adapt to situational conflicts, which helps explain when independent directors matter for corporate governance.

Family firm succession: the management buy‐out and buy‐in routes

Purpose – This exploratory study aims to provide fresh insights into the ownership transfer of private family firms through internal management buy‐out (MBO) and external management buy‐in (MBI) succession routes. The paper aims to explore if flows of information impact the succession planning process and if the nature of succession planning impacts the business sale negotiation process relating to family firms that select MBO/MBI succession routes.

When Do Managers Seek Private Equity Backing in Public-to-Private Transactions?

Over the last decade, the going private market has experienced a considerable boom in size and also has become more interesting for private equity investors that are looking to partner with incumbent management. This offers managers the choice to take the firm private themselves in a traditional management buyout or to seek private equity backing. We propose that managers decide for a management buyout without any involvement of private equity in case they are less financially constrained: when their firms are undervalued, have high cash levels, are smaller and less financially visible, and the managers own a large toehold. In contrast, managers invite participation of private equity investors when they cannot complete the deal themselves: in firms that are larger, have less cash and managers own a smaller fraction of the firm. Our analysis on a sample of UK public-to-private transactions completed over the period 1997-2003 provides results that are in line with these predictions.

Private Equity and the Culture of Value Extraction

Private Equity and the Culture of Value Extraction

MANAGEMENT BUYOUTS, SUPERVISION AND EMPLOYEE DISCRETION

ABSTRACTUsing a matched sample of 1959 firms and 27,263 employees from the UK Workplace Employee Relations Survey, we examine the effects of the management buyout (MBO) organizational form on employee discretion and supervision. Our findings suggest that for MBO firms, supervision is lower where there is a higher proportion of craft and skilled service workers but is not lower for other occupational groups. Using random effects ordered probit analysis, we find that employees' discretion over their work practices is higher in MBO firms; and that the probability of higher discretion is greater where there is a higher proportion of craft and skilled service employees. Our findings are consistent with: (i) MBOs reducing hierarchical tiers and the number of supervisory staff, which increase employees' span of control and their discretion; and (ii) organizational change via an MBO being ‘skill biased’ in favour of craft and skilled service employees.

Charting an Icarian Flightpath: The Implications of the Qantas Deal Collapse

The failed bid for control of Qantas reveals a multitude of weak points in the governance of management buyouts. The paper situates the Qantas collapse within the context of an increasingly acrimonious global debate over the utility of private equity financing. Regulators in the United States, Australia and the United Kingdom have expressed concern that unrestricted expansion increases the risk of market manipulation and macroeconomic instability. The paper evaluates whether such concerns are justified by investigating the impact of private equity across a number of critical pressure points within the corporation and between it and those providing the intermediating services required to remain in or exit the public market.