Management Buy-Outs

TABLE OF CONTENTS

ABSTRACT 2

BACKGROUND 2

MANAGEMENT BUYOUTS 2

PRINCIPAL – AGENCY CONFLICT 3

RESEARCH QUESTION 4

EMPIRICAL EVIDENCE 5

EFFECT ON STOCK PRICES FOR PUBLIC COMPANIES GOING PRIVATE: 6

CASE STUDY 7

CONCLUSION 10

APPENDIX 11

REFERENCES 12

ABSTRACT

A growing dissatisfaction in recent years with public ownership, and the apparently widespread conviction that management-buyout transactions provide a way to get rich, have contributed to a trend for publicly owned corporations to go private via management buyouts. This paper uses empirical evidence which investigates the determinants of management buyout activity through the use of an abnormal return premium from the time of announcement till the final trading day. Using a specific case study, we have illustrated also illustrate the entire process of a management buyout along with its effect on shareholders wealth, operating efficiency and management composition of the firm going private.

BACKGROUND

MANAGEMENT BUYOUTS

A Management Buyout is defined as a buyout initiated by the incumbent top management team of a publicly-listed corporation where the end owners would be the previously-mentioned top management team and possibly an investor or group of investors. In general, a buy-out involves the “acquisition of an enterprise by a group of individual managers and investors” (Wright, Robbie, Chiplin, and Albrighton). In a management buy-out, in particular, current senior management members initiate the transaction and become the main non-institutional equity holders (Casson, Yeung, Basu and Wadeson).

The purpose of such a buyout from the managers' point of view may be to save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team. Another aim could be to maximize the financial benefits received from the success they bring to the company by taking the profits for themselves.

There are two main types of...