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Management Buy Out MBA7122

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Page 1: Copy of MBO

Management Buy OutManagement Buy Out

MBA7122MBA7122

Page 2: Copy of MBO

• Whether the incumbent management of the target of the buyout is part of the team initiating the buyout and invests in the equity of Newco.

• Whether the target firm is a company listed on a stock exchange and includes the public, both institutional and individual, investors as shareholders.

• Whether the management team consists of incumbent target management or it includes new managers from outside or a mixture of both.

• Whether the incumbent management of the target of the buyout is part of the team initiating the buyout and invests in the equity of Newco.

• Whether the target firm is a company listed on a stock exchange and includes the public, both institutional and individual, investors as shareholders.

• Whether the management team consists of incumbent target management or it includes new managers from outside or a mixture of both.

Types of LBOs differ in the following respects.Types of LBOs differ in the following respects.

Page 3: Copy of MBO

Investor BuyoutInvestor Buyout

• The LBO sponsor buys the target without involving the target management.

• In some cases the management itself may be attempting a MBO with the support of another LBO firm.

• Example – In the LBO of RJR Nabisco, KKR was pitted against the MBO proposal led by the then CEO, Ross Johnson.

• Thus the management was excluded from the IBO.

• The LBO sponsor buys the target without involving the target management.

• In some cases the management itself may be attempting a MBO with the support of another LBO firm.

• Example – In the LBO of RJR Nabisco, KKR was pitted against the MBO proposal led by the then CEO, Ross Johnson.

• Thus the management was excluded from the IBO.

Page 4: Copy of MBO

Management Buy OutManagement Buy Out

• The management buyout initiative, may come from the target’s incumbent managers who then arrange the support of a private equity firm.

• The parent may also run an auction for the target and the target management then teams up with the winning sponsor.

• The management buyout initiative, may come from the target’s incumbent managers who then arrange the support of a private equity firm.

• The parent may also run an auction for the target and the target management then teams up with the winning sponsor.

Page 5: Copy of MBO

Management Buy OutManagement Buy Out

• What drives managers to become owners of the businesses they have run under the direction and control of a parent?

• What drives managers to become owners of the businesses they have run under the direction and control of a parent?

Page 6: Copy of MBO

TYPICAL MBOTYPICAL MBO

•Equity•Redeemable Preference Shares•Senior Debt•Subordinated Debt

Page 7: Copy of MBO

MBO: A Survey by Wright et al. (1991)MBO: A Survey by Wright et al. (1991)

• Opportunity to control own business;

• Long term faith in company;

• Better financial rewards;

• Opportunity to develop own talents;

• Absence of head office constraints;

• Fear of redundancy;

• Fear of new owner after anticipated acquisition

• Opportunity to control own business;

• Long term faith in company;

• Better financial rewards;

• Opportunity to develop own talents;

• Absence of head office constraints;

• Fear of redundancy;

• Fear of new owner after anticipated acquisition

Page 8: Copy of MBO

MBOMBO

Financial and investment constraints imposed by the head office in a group may result in under-exploitation of the full potential of a business, and may lead to frustration among the divisional managers.

Financial and investment constraints imposed by the head office in a group may result in under-exploitation of the full potential of a business, and may lead to frustration among the divisional managers.

Page 9: Copy of MBO

Incentives in MBOIncentives in MBO

• MBOs have been structured to include an incentive for the management to achieve or exceed agreed levels of performance after the buyout.

• Such an incentive is known as ratchet.

• Three types of ratchet related to targets based on:

(a)Profit level;

(b)Time of exit and value achieved on exit;

(c)Debt repayment.

• MBOs have been structured to include an incentive for the management to achieve or exceed agreed levels of performance after the buyout.

• Such an incentive is known as ratchet.

• Three types of ratchet related to targets based on:

(a)Profit level;

(b)Time of exit and value achieved on exit;

(c)Debt repayment.

Page 10: Copy of MBO

Ratchets and PROVIDERS OF CAPITAL: Ratchets in a MBO

Ratchets and PROVIDERS OF CAPITAL: Ratchets in a MBO

• The first two ratchets (profit level, time of exit and value achieved on exit) increase the amount or proportion of equity made available to the management when the targets are met.

• The last ratchet (debt repayment) allows the interest margin on senior debt to be reduced if the MBO generates a sufficiently high level of cash flows.

• Reverse ratchets penalize management for failure to achieve targets.

• The first two ratchets (profit level, time of exit and value achieved on exit) increase the amount or proportion of equity made available to the management when the targets are met.

• The last ratchet (debt repayment) allows the interest margin on senior debt to be reduced if the MBO generates a sufficiently high level of cash flows.

• Reverse ratchets penalize management for failure to achieve targets.

Page 11: Copy of MBO

Institutional (Investors’) Rights in case of a MBOInstitutional (Investors’) Rights in case of a MBO

• The right to veto certain critical business matters

• The right to receive certain management and financial information

• The right to appoint a director

• Warranties from management

• A restriction on the payment of dividends

• A restriction on a manager competing if he leaves the business

• Restrictions on share transfers and issues

• The inclusion of a provision which compels a manager to sell his shares if he leaves the business (with the exit price to be determined based on whether he is leaving on good or bad terms)

• The right to veto certain critical business matters

• The right to receive certain management and financial information

• The right to appoint a director

• Warranties from management

• A restriction on the payment of dividends

• A restriction on a manager competing if he leaves the business

• Restrictions on share transfers and issues

• The inclusion of a provision which compels a manager to sell his shares if he leaves the business (with the exit price to be determined based on whether he is leaving on good or bad terms)

Page 12: Copy of MBO

Institutional (Investors’) Rights in case of a MBOInstitutional (Investors’) Rights in case of a MBO

• The inclusion of a provision which compels a corporate shareholder to sell its shares if there is a change in control of the shareholder

• The inclusion of “tag along” provisions (to ensure that if an offer is made to the majority shareholder for its shares, the minority shareholders can elect to sell their shares to the same purchaser on the same terms)

• The inclusion of “drag along” provisions (to ensure that if a majority shareholder wishes to sell its shares then it can force the minority to sell their shares to the same purchaser on the same terms)

• The inclusion of a provision which compels a corporate shareholder to sell its shares if there is a change in control of the shareholder

• The inclusion of “tag along” provisions (to ensure that if an offer is made to the majority shareholder for its shares, the minority shareholders can elect to sell their shares to the same purchaser on the same terms)

• The inclusion of “drag along” provisions (to ensure that if a majority shareholder wishes to sell its shares then it can force the minority to sell their shares to the same purchaser on the same terms)

Page 13: Copy of MBO

19-6-2007 (Indian Scenario)19-6-2007 (Indian Scenario)

• It was a historical day for Indian private equity with global buyout firm Blackstone completing India’s largest management buyout ever.

• This may just be the beginning of a slew of management buyouts in India (reported by CNBC-TV18)

• It’s a big deal for Intelenet and quite literally so.

• The management has just bought out the company along with PE giant, Blackstone, in what is touted to be amongst India’s first few management buyouts ever.

• That marked the exit of promoters HDFC and Barclays Bank.

• But traditionally, MBOs have not been very popular in India. That's partly because of a paucity of funds and partly because, Indian companies are mostly family owned.

• It was a historical day for Indian private equity with global buyout firm Blackstone completing India’s largest management buyout ever.

• This may just be the beginning of a slew of management buyouts in India (reported by CNBC-TV18)

• It’s a big deal for Intelenet and quite literally so.

• The management has just bought out the company along with PE giant, Blackstone, in what is touted to be amongst India’s first few management buyouts ever.

• That marked the exit of promoters HDFC and Barclays Bank.

• But traditionally, MBOs have not been very popular in India. That's partly because of a paucity of funds and partly because, Indian companies are mostly family owned.

Page 14: Copy of MBO

19-6-2007 (Indian Scenario)19-6-2007 (Indian Scenario)

• Bankers: If Intelenet was promoted and owned by a first generation enterpreneur, he would prefer selling out to a strategic investor than to the management. That’s because in family owned businesses, there’s no line that divides management from ownership.

• In the case of broking house SSKI, which is a family run business, the management was in talks to take it over. The promoter was believed to be in talks to sell it to a competitor.

• But months later, SSKI continues to be up for sale scouting for a strategic investor to sell out. Like SSKI, many promoters prefer selling out to strategic investors than to managements because MBOs do not ensure the promoter the best price.

• Bankers: If Intelenet was promoted and owned by a first generation enterpreneur, he would prefer selling out to a strategic investor than to the management. That’s because in family owned businesses, there’s no line that divides management from ownership.

• In the case of broking house SSKI, which is a family run business, the management was in talks to take it over. The promoter was believed to be in talks to sell it to a competitor.

• But months later, SSKI continues to be up for sale scouting for a strategic investor to sell out. Like SSKI, many promoters prefer selling out to strategic investors than to managements because MBOs do not ensure the promoter the best price.

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19-6-2007 (Indian Scenario)19-6-2007 (Indian Scenario)

• But that maybe changing now. With deep pocketed PE players and buyout firms like Blackstone, Carlyle and Texas Pacific getting aggressive in India, MBOs have moved on from being impossible to lucrative.

• IN 2006 alone, over USD 7.5 billion of PE money has come to Dalal Street.

• And with many new players betting big on India, the MBO market maybe in for some good times.

• MBOs are expected to be popular in new businesses like IT, ITES and media and in non-core businesses of older economy companies.

• But that maybe changing now. With deep pocketed PE players and buyout firms like Blackstone, Carlyle and Texas Pacific getting aggressive in India, MBOs have moved on from being impossible to lucrative.

• IN 2006 alone, over USD 7.5 billion of PE money has come to Dalal Street.

• And with many new players betting big on India, the MBO market maybe in for some good times.

• MBOs are expected to be popular in new businesses like IT, ITES and media and in non-core businesses of older economy companies.

Source: http://www.moneycontrol.com..........02/42/287246

Page 16: Copy of MBO

List of Buyouts of Indian companiesList of Buyouts of Indian companies

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INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

Company Website www.nitrexchemicals.com

Business Sector Industrials

Country of Operation India

Market South Asia

Investment Status Current Portfolio

Investment Type Buyout Capital

Date of Original Investment 2004

Office Mumbai, India

Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)

Page 18: Copy of MBO

19-6-2007 (Indian Scenario)19-6-2007 (Indian Scenario)

• The creation of Nitrex, the former nitrocellulose manufacturing and trading division of ICI India, by Actis and the management team was a landmark deal in the Indian private equity market.

• The management buyout (MBO) of Nitrex is among India’s first ever MBO’s, and follows Actis’s completion in 2003 of India’s first private equity backed privatisation, confirming Actis’s place as one of the leading private equity firms in India.

• The creation of Nitrex, the former nitrocellulose manufacturing and trading division of ICI India, by Actis and the management team was a landmark deal in the Indian private equity market.

• The management buyout (MBO) of Nitrex is among India’s first ever MBO’s, and follows Actis’s completion in 2003 of India’s first private equity backed privatisation, confirming Actis’s place as one of the leading private equity firms in India.

Source: http://www.moneycontrol.com..........02/42/287246

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INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

• Their needs - ICI India was looking for a buyer who would not only ensure the continuity of the business in line with their own values but who would also take an employee-friendly approach to the buyout.

• The incumbent management team of the nitrocellulose division had extensive experience and a deep understanding of the business, and a strong vision for expanding the business internationally.

• Their needs - ICI India was looking for a buyer who would not only ensure the continuity of the business in line with their own values but who would also take an employee-friendly approach to the buyout.

• The incumbent management team of the nitrocellulose division had extensive experience and a deep understanding of the business, and a strong vision for expanding the business internationally.

Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)

Page 20: Copy of MBO

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

• Changes in the market landscape offered up opportunities to develop the business through organic growth and acquisitions and the management team wanted a backer who would provide more than just money.

• They needed a backer with unrivalled business expansion experience and the international business exposure to help them deliver on their vision.

• Changes in the market landscape offered up opportunities to develop the business through organic growth and acquisitions and the management team wanted a backer who would provide more than just money.

• They needed a backer with unrivalled business expansion experience and the international business exposure to help them deliver on their vision.

Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)

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INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

• ACTIS SOLUTION

• Actis identified strong synergies between the vision of the management team and the value that we could create for the business.

• Actis’ experience of working with corporate vendors also enabled them to navigate effectively the often sensitive process of spinning out a business by building strong relationships with both the vendor and the management team.

• In March 2004 the purchase of the nitrocellulose division by Actis and the management team was completed for an upfront payment of US$13.8million and Nitrex was created.

• ACTIS SOLUTION

• Actis identified strong synergies between the vision of the management team and the value that we could create for the business.

• Actis’ experience of working with corporate vendors also enabled them to navigate effectively the often sensitive process of spinning out a business by building strong relationships with both the vendor and the management team.

• In March 2004 the purchase of the nitrocellulose division by Actis and the management team was completed for an upfront payment of US$13.8million and Nitrex was created. Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)

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INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

• Actis’s added value - Actis’s experience of negotiating and executing management buyouts from corporate vendors enabled us to complete the deal in just 75 days.

• This enabled the management team to communicate positively and maintain strong relations with the staff of over 100 employees who have historically played a key role in improving production processes within the business.

• The swift execution of the deal also enabled the management team to manage effective communications with key customers and further strengthen their relationships through what can often be unsettling times for all stakeholders in the business.

• Actis’s added value - Actis’s experience of negotiating and executing management buyouts from corporate vendors enabled us to complete the deal in just 75 days.

• This enabled the management team to communicate positively and maintain strong relations with the staff of over 100 employees who have historically played a key role in improving production processes within the business.

• The swift execution of the deal also enabled the management team to manage effective communications with key customers and further strengthen their relationships through what can often be unsettling times for all stakeholders in the business.

Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)

Page 23: Copy of MBO

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

INDIA’S FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it “the positive power of capital”

Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)

• Since investing, Actis has provided critical support for Nitrex’s expansion options, acquisition plans and divestment.

• Actis sourced and led the search for acquisition opportunities by identifying suitable targets and helping management negotiate debt packages to complete the acquisition successfully.

• Actis supported the management in their expansion plans by providing strategic support on the plans to add a green-field plant.

• On the corporate governance side, Actis helped build a solid board by identifying suitable Non Executive Directors with strong industry experience and also assisted in improving the internal systems and health and safety practices, including pollution controls.

• Since investing, Actis has provided critical support for Nitrex’s expansion options, acquisition plans and divestment.

• Actis sourced and led the search for acquisition opportunities by identifying suitable targets and helping management negotiate debt packages to complete the acquisition successfully.

• Actis supported the management in their expansion plans by providing strategic support on the plans to add a green-field plant.

• On the corporate governance side, Actis helped build a solid board by identifying suitable Non Executive Directors with strong industry experience and also assisted in improving the internal systems and health and safety practices, including pollution controls.