Lecture 1 Flashcards
Who is buying in LBO?
Institutional Investor: IBO
Current Management: MBO
New Management: MBI
Employees: EBO
Why sell?
Succession problems
Spinn-off
Turnaround (urgent need for financing)
Privatization (government organization want to privatize some of its operations to raise money)
Going-private
Growth
LBOs - Some characteristics of a strong candidate
Strong cash flow generation
Competitive market position
Growth opportunities (profitable top-line growth through both organically and potential future add-on acquisitions (buy and build strategy))
Strong asset base
Low capex requirements
Efficiency-raising chances
Why strong asset base?
Assets act as collateral against a loan, therefore increases the likelihood of principal recovery in the event of a bankruptcy.
Which conflicts of interests are there regarding MBOs?
Time, Price, Information
MBO conflict situation - information. How can conflicts be prevented?
If the manager shares insider information to the selling shareholders
MBO conflict situation - price.
Management has no obligation to advise the shareholder on an adequate sales price
MBO conflict situation - time. How can conflicts be prevented?
Managers have to invest a considerable amount of time in the buy out process
LBO What are bankers looking for?
- strong positive cash flow
- equity contribution of 30% to 40%
- repayment of senior A within 7 years
- first charge over assets as security
- financial and other covenants (interest coverage of 2.5-3x; leverage of 3.5-8x EBITDA)
- cash cover of at least 1
first charge
The lender for whom charge over assets is first created is called the holder of first charge
MBO: What is expected from the Mgt.?
- Equity investment of 1 times annual salary
- considerable upside reward for success
- total commitment to the project
Advantages and disadvantages of MBI
Pro:
- new outside perspective
- greater growth potential
Con:
- higher rate of job losses
- weaker competitive market position
