Sell off
Involves selling part of a business to a third party usually for cash
Spin off
No change in ownership of the business new company is created with assets transferred to it
Reasons for sell-offs/ spin-offs (6)
- Different types of businesses
- Defence strategy
- Improved efficiency
- Removal of negative synergy
- Improved use of resources
- After acquisition (asset stripping)
Reasons against divestment (3)
- Vulnerability (to takeover)
- Loss of economies of scale
- Harder to raise finance/ higher cost
Management buy out
Existing managers of a business (commonly join with VC funds and banks) to buy it from the current owners
Common incentives featuring in MBO (2)
- Envy ratios
- Rachet
Envy ratio
Where management team invests less than VC to obtain percentage of shares
Rachet
Where management team outperform forecasts, percentage shareholding increases
Institutional buy out (IBO)
Institutions via an auction buy business (usually achieves higher price than traditional MBO)
Details of IBO (2)
- More common than MBOs for large deals (> £50m) where it’s too hard for management to raise finance
- Management often offered equity incentives to motivate
Management and employee buy out (MEBO)
Key employees and executive management
Employee buy out (EBO)
All employees offered an opportunity to buy a stake
Management buy-in (MBI)
Outside managers, backed by institutions
MBO details (2)
- Benefit from existing management expertise
- Often used in niche sectors
Buy in management buy out (BIMBO)
External managers join forces with internal management and financial institutions
Advantages of BIMBO (3)
- More reliable information because existing managers invited to join new venture
- Less acquisitional slippage as existing managers are motivated to make the deal succeed
- Vendor knows employees are likely to be safe after the sale
Leveraged buy out (LBO)
Can imply cross border ownership (significant amount of borrowing to finance acquisition)
Circumstances behind buy-outs (5)
- Needs investment
- Parent needs to reduce borrowings
- Retirement
- Insolvent parent company
- Insolvent company
Buy out structures (2)
- Sale of shares
- Sale of assets
Sale of shares
Most straightforward form of MBO > managers acquire shares in the target
Sale of assets
May not be possible or desirable to acquire shares in target, so Newco acquires assets and trade of business instead
Use of a Newco (3)
- Rare not to use Newco
- Can obtain tax relief on interest paid on borrowings obtained to acquire target and offset against target’s taxable profits
- Desired shareholding structure can be more easily achieved with fresh company
Eventual mix of debt and equity influenced by
Performance and objectives of lead finance provider
Equity vs debt
Equity is more expensive to the company than debt, however, over-leveraging a business with debt is risky
