CFA, Finance

Leverage Buyout vs Management Buyout

What is a Buyout?

Buyout involve the process of obtaining a controlling interest in another company by purchasing majority stake (at least 51% of company’s voting shares) in order to gain control of the target company. Usually, a buyout also includes the purchase of the target’s outstanding debt, which is also referred as assumed debt by the acquirer. Buyout occurs when the acquirer has a belief that the assets of the company are undervalued. Buyout can be Leverage buyout or Management buyout.

 What is Leverage Buyout?

A Leverage buyout is the acquiring another company using a notable amount of borrowed money to meet the cost of this acquisition. The assets of the company which is acquired are used as the collateral for the loans. These leveraged buyouts enable the purchasers to procure large companies without the need of any commitments of huge amounts of capital. Basically, LBOs allow firms to have a better equity returns as it acts as part of a Mergers and Acquisitions (M&A) strategy by acquiring the competition and also to get entry in new markets. It helps a company to diversify its portfolio. Buyers prefer leveraged buyouts because they don’t need to put in very much of their own money, that allows them to gain a higher IRR i.e. internal rate of return.

For example, the first LBO in India was done in year 2000 by Tata Tea for UK based Tetley. After that many Indian companies used LBO. These are UB Group, Tata Motors, Tata Steel, Suzlon Energy, Zoom Auto etc.

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What is Management Buyout?

A management buyout is a type of transaction where the management team of a company purchases the assets and functioning of the business they manage. This is generally done so that a company can go in an effort to smoothen the functions and improve profitability. MBO also takes place when the owners want to go for retirement, or for the large business firms that want to sell some parts of their business as they aren’t the part of their core business. MBO obstruct shares from being scattered and sustains management.

For example, consider a company ABC which is publicly traded where 70% of the stock is floated in public and the remaining is controlled by the management. Now the management will purchase some enough shares of the outstanding stock from the public which will give them the controlling interest of at least 51% shares of the company. We can see the Management Buyout by Blackstone Group which bought 80% shares of Intelent Global Services Ltd. It was the first Management Buyout of India.

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Leverage Buyout VS Management Buyout

  • Management Buyout is a part of Leverage Buyout.
  • Leverage Buyout includes the use of a very high amount of debt by a firm or a group of investors who want to acquire the other firm or the target firm. The Management Buyout is a type of Leverage Buyout where a part of the acquiring firm or the investors involves the top-level managers of the targeted (to be acquired) firm.
  • Leverage Buyout is buying of a company using debt instruments issued either to the seller or to the third party. On the other hand, Management Buyout is purchase of a company by the management team of the same company.
  • In Leverage Buyout, the firm that acquired the company puts their own management team on work whereas in Management Buyout the present management team continuous to work.

Author- Disha Agrawal

About the author: Disha Agrawal is an Economics graduate and presently pursuing MBA with specialization in Financial Administration from Prestige Institute of Management and Research, Indore. She is a keen learner and is intrigued with financial markets. She is committed to her work and strives for continuous improvement.

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