|MANAGEMENT BUYOUTS ARE BECOMING MORE WIDESPREAD|
Aruba, April 30, 2014 - Having overseen a number of Management Buyouts, Frank Fischer, Apex Equity Partners’ Managing Director, says he has noticed a trend of substantial positive cash-flow earnings within the purchased company ahead of a deal. “Management buyouts, or MBOs, are particularly appropriate in the case of non-core divisions of larger companies, which are relatively mature businesses with reasonably predictable cash flows,” explains Fischer. “MBOs attempt to build enterprise value through operating improvements that increase cash flow or strategic acquisitions that increase market share or revenue growth.” While buyouts of corporate divisions are more common and offer the benefits of an established business to the purchasing members of management, some total corporate buyouts— like the purchase of Dell by founder Michael Dell last year— are done to remove the company checkbook from the scrutiny of public shareholders.
“The defense from Dell is the standard one,” wrote Steve Schafer in Forbes, “He and the board’s special committee, which supported the Dell offer from the start, argue that the PC-maker needs to make painful changes that are better executed away from the scrutiny of public markets and demands of quarterly profit checkpoints.” While strong financial viability is often a critical aspect for members of management to consider before taking over a division of a larger company, it can predictably drive up the cost when taking over the whole of a public company. The Securities and Exchange Commission could increase oversight over MBO deals in the future, according to Peter Henning of The New York Times.
“The problem in any transaction designed to squeeze out minority shareholders is that the incentive for the buyer is to pay the lowest price possible, but corporate leaders also have an obligation to protect all shareholders from an unfair transaction,” said Henning. “Thus, the controlling shareholder has to try to maintain at least the facade that the deal provides adequate compensation.”
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