When managers buy/Kad menadžeri kupuju

In this issue we will take a break from perfecting our writing skills and have a look at a business concept that has aroused a lot of controversy lately. We will outline what is actually meant by management buyout (MBO), under what circumstances it becomes a preferred way of taking over or selling a company and most importantly, how it is financed.

MBO is defined as a form of acquisition where a company’s existing managers acquire a large part (a controlling stake) or all of the company. For the owner of a company as a seller the selling procedure is less complicated since the buyers, being the company’s managers, are familiar with the business so the due diligence process can be less thorough and there are no special warranties required. However, even well-developed capitalist systems recognized the possibilities of abuse inherent in that type of acquisition. The management obviously has more information and they are tempted to run the business in such a way that ‘a subtle downturn of a share price’ can occur. For these reasons MBOs are sometimes said to be a form of insider trading.

Owners usually resort to it when a company is faced with bankruptcy and in transition economies it is increasingly used to make state-owned companies into private ones. The latter scenario is well-known in China where it is met with criticism since managers are often found to engage in malpractice which damages the interests of stakeholders while bringing them personal gains. In some rare cases this method is indeed recognized as a way of warding off aggressive buyers and avoiding hostile takeovers.

When it comes to financing, banks usually see MBOs as a too risky investment so private equity investors or business angels often step in. In exchange for the funding provided they will gain ownership in the company and restrict the way the company is managed. Apart from these ways of raising finance there is a method called vendor financing. It describes a situation in which the seller finances the buyout. In that case the price is paid over the years following the sale out of the profits of the company. The advantage sellers have in that kind of a deal is not immediately obvious but refers primarily to tax deductions. In the leveraged management buyout (LMB0) the buyers (company managers) use company assets as collateral to secure financing. Even when MBO is a preferred way of taking over a company and regardless of the financing methods employed, the process is characterized by transparency of the procedure, clear involvement of the owner who sets the price and determines other terms of sale as well as absence of any hidden agendas.