MBO AND LBO

CONTENT
Part 1: MBO Part 2: LBO
1. Introduction 1. Introduction
2. Historical Context and Evolution 2. Historical Context and Evolution
3. MBO process 3. LBO process
4. Types of MBO 4. Types of LBO
5. Key stakeholders involved in 5. How Does an LBO Work
MBOs 6. Benefits of LBOs
6. Reasons for Management 7. Risks of LBOs
Buyouts 8. Case Study
7. Advantages 9. Conclusion
8. Challenges and Risks
9. Case Study
10. Conclusion
 Introduction
A Management Buyout (MBO) is a corporate restructuring strategy in which
the existing management team of a company acquires a controlling interest
or all the assets of the business they manage. This transaction typically
involves the management team securing financing from external sources,
such as private equity firms or financial institutions, to facilitate the
purchase.
Historical Context and Evolution
Mid-20th Century: Management Buyouts (MBOs) trace back to this era, with early variations
existing.
1960s-1970s: Modern MBOs gained traction due to factors like deregulation, tech advancements,
and shifting market dynamics.
1980s: MBO activity surged significantly. Factors include cheap debt financing, emergence of
leveraged buyouts (LBOs), and rising interest from private equity investors. Iconic MBOs like RJR
Nabisco's acquisition in 1988 became notable.
1990s-Early 2000s: MBOs evolved with a focus on operational improvements, strategic
realignment, and value creation. Popular among management seeking autonomy, shareholder
value enhancement, and entrepreneurial leadership.
Post-2008 Financial Crisis: MBO activity slowed due to tight credit markets and economic
uncertainty. Regained momentum later due to factors like low interest rates, restructuring
opportunities, and continued private equity interest.
Today: MBOs remain prominent, utilized by diverse companies across industries to achieve
strategic objectives, unlock shareholder value, and drive sustainable growth.
 MBO process
1 Preparation
The management team conducts thorough due diligence on the company's operations, finances, and market position. They also
develop a comprehensive business plan outlining their strategic vision for the future of the business.

2 Negotiation
Management negotiates terms with the company's current owners, which may include existing shareholders or other stakeholders.
This negotiation typically covers aspects such as the purchase price, financing arrangements, and any conditions or contingencies
attached to the transaction.

3 Financing
Once the terms are agreed upon, the management team secures the necessary financing to fund the buyout. This may involve a
combination of equity investment from the management team themselves, as well as debt financing from banks, private equity firms, or
other lenders.

4 Implementation
With financing in place, the management team formally takes control of the company. They begin implementing their strategic plan, which
may involve operational changes, cost-cutting measures, or other initiatives aimed at improving the company's performance and value.
 Types of MBOs
Leveraged Buyouts (LBOs): In an LBO, the acquisition is financed primarily through
borrowed funds, using the assets of the acquired company as collateral. This allows the
management team to leverage the company's existing assets to finance the buyout.

Management Buy-Ins (MBIs): Unlike MBOs, where the existing management team
purchases the company they currently work for, MBIs involve external management teams
acquiring a controlling stake in a company they do not currently manage. This often occurs
when external managers see potential in a company and seek to take control of its
operations.
Key stakeholders involved in MBOs
1 Management team

The current managers who lead the business and seek to acquire ownership.

2 Current owner

The individuals or entities currently holding ownership of the business being acquired.

3 Investors
Individuals or institutions providing financial support for the MBO, either through equity
investment or debt financing.

4 Lenders
Financial institutions or investors providing the necessary capital for the buyout, often in the
form of loans or lines of credit secured by the assets of the acquired company.
 Reasons for Management
Buyouts
Desire for Autonomy and Control
01
Management buyouts often occur when the current management team desires greater autonomy and
control over the direction and decision-making processes of the company.

02 Opportunity for Entrepreneurial Leadership

Management buyouts provide an opportunity for entrepreneurial-minded managers to take ownership of
the business they operate.

03 Alignment of Interests between Management and

Ownership
MBOs align the interests of the management team with those of the company's owners, creating a shared
goal of maximizing value and profitability.

04 Potential to Unlock Value and Drive Growth

Management buyouts offer the potential to unlock hidden value within the company by implementing
operational improvements, cost-saving measures, and strategic initiatives.
Advantages of Management
Buyouts
01 Management expertise: Existing management knows the business
inside out, reducing transition risks.

02 Alignment of interests: Management becomes owners, incentivizing

them to maximize company performance.

03 Flexibility: Ability to implement strategic changes quickly without

external interference

04 Confidentiality: Transactions can be conducted discreetly, minimizing disruption t

opera.
 Financing constraints
1 Difficulty in securing funding, especially in
uncertain economic conditions.

Challenges Valuation discrepancies:

Differing perceptions of value between
2
and Risks management and current owners.

Operational disruptions
Potential for distractions during the process
3 impacting day-to-day operations.
Dell Technologies
In 2013, founder Michael Dell led a management
buyout of the technology company he started in his
college dorm room.
The buyout, valued at approximately $24 billion,
allowed Dell to take the company private, providing
greater flexibility to implement long-term strategic
initiatives away from public scrutiny.
Following the buyout, Dell underwent a significant
transformation, focusing on diversifying its product
offerings and expanding into new markets,
including cloud computing and cybersecurity.
Conclusion
Management buyouts (MBOs) represent a strategic
approach for management teams to gain ownership
and control of the businesses they operate.

Through MBOs, managers can pursue autonomy,

entrepreneurial leadership, and alignment of interests
with ownership, leading to enhanced motivation and
commitment to long-term success.
 Introduction
A leveraged buyout (LBO) is a financial transaction where a company is
acquired using a significant amount of borrowed funds, usually through
loans or bonds. LBOs are often used by investors and private equity firms to
acquire control of a company, restructure it, and potentially sell it at a higher
price in the future.
Historical Context and Evolution
1960s and 1970s: LBOs emerged as a strategy for corporate takeovers and restructuring. A
notable example was the acquisition of Orkin Exterminating Company by Rollins Inc. in 1964,
setting the stage for modern LBOs.

1980s: Dubbed the "Decade of Greed" or "LBO Craze," LBO activity surged with easy access to
credit and favorable tax policies. High-profile deals like RJR Nabisco acquisition epitomized this era.

Late 1980s: Regulatory challenges and market turbulence, including the savings and loan crisis and
regulatory reforms, caused a temporary slowdown in LBO activity.

1990s and early 2000s: LBOs saw a resurgence driven by globalization, financial deregulation, and
the rise of private equity firms. Private equity became adept at executing large-scale transactions
across industries.

Mid-2000s: LBO activity peaked with mega-deals like the TXU Energy acquisition in 2007.
However, the global financial crisis of 2008–2009 led to tighter credit conditions and reduced
investor confidence, impacting LBOs.
 LBO process
1 Identification
Acquirers identify potential target companies that fit their investment criteria.

2 Due Diligence
Thorough examination of the target company's financial, operational, and legal aspects to assess its viability for an LBO.

3 Financing
Securing debt financing from lenders to fund a significant portion of the acquisition cost.

4 Acquisition
The target company is acquired, typically with a combination of equity investment from the acquirer and borrowed funds.

5 Restructuring
Post-acquisition, the management team may implement operational and strategic changes to improve the target company's
performance and increase its value.

5 Exit
The acquirer aims to exit the investment through methods such as selling the company to another entity, conducting an initial public offering
(IPO), or recapitalizing.
 1 Debt Financing:
Includes senior debt, mezzanine debt, and
sometimes high-yield bonds.

Types of Equity Financing

Funds contributed by the private equity

Financing 2
firm and sometimes co-investors.

in LBOs 3
Leverage Ratio
Indicates the proportion of debt to equity
used in the acquisition.
How Does an LBO Work
The process starts with a financial sponsor, such as a private
equity firm, identifying a target company for acquisition.
The sponsor raises capital from investors and arranges debt
financing from banks or other lenders.
The acquired company's assets are often used as collateral for
the loans, and the cash flow of the target company is relied upon
to repay the debt.
 Potential for high returns
01 IIf the acquired company performs well post-
acquisition, the returns for the financial sponsor and
investors can be substantial.

Benefits of 02
Alignment of incentives
Management often holds a stake in the acquired

LBOs
company, aligning their interests with those of the
financial sponsor.

Opportunity for restructuring

03 ILBOs can provide an opportunity to restructure the
acquired company, improving operational efficiency
and profitability.
 Risks of LBOs

01 High debt levels: LBOs involve taking on significant debt, which can
increase financial risk, especially if the acquired company's performance
deteriorates.

02 Dependence on cash flow: The success of an LBO often depends on

the ability of the acquired company to generate sufficient cash flow to
meet debt obligations.

Regulatory and legal risks: LBOs can attract regulatory scrutiny,

03 particularly if they involve layoffs or significant changes to the acquired
company's operations.
 Hilton Hotels
Industry Expertise: Blackstone, a leading private equity firm
with extensive experience in the hospitality sector,
understood the nuances of the hotel industry.

Capital Structure: Blackstone structured the deal with a

balanced mix of debt and equity, optimizing leverage
without overburdening the company.

Global Expansion: Blackstone supported Hilton's

international growth initiatives, capitalizing on emerging
markets and expanding the brand's footprint.

Timing and Execution: Despite economic uncertainties,

Blackstone's timing and execution were impeccable,
allowing Hilton to thrive even during challenging times.
Conclusion
In conclusion, Leveraged Buyouts (LBOs) represent a
powerful mechanism for restructuring and revitalizing
companies, often leading to significant value creation for
investors and stakeholders alike.

Throughout this presentation, we have explored the

mechanics of LBOs, their advantages, challenges, and the
impact on various stakeholders.