Buyout Basics

Table of Contents

1  Introduction 1  Introduction...................................................................................................1

1.1  Relevance of the subject 1  

1.2  Outline of the work 2  

2  Description of a buyout 3  

2.1  Definition 3  

2.2  Types of buyouts 4  

2.2.1  MBO 4  

2.2.2  MBI 5  

2.2.3  BIMBO 5  

2.2.4  OBO 5  

2.2.5  EBO 5  

2.2.6  IBO 6  

2.3  Motivations for buyouts 7  

2.3.1  Succession problems 7  

2.3.2  Spin-off 7  

2.3.3  Turnaround 7  

2.3.4  Going-private 8  

2.3.5  Privatisation 8  

3  Financing of a buyout 9  

3.1  Leveraging 9  

3.1.1  Definition 9  

3.1.2  Preconditions of the company 9  

3.1.3  Financial  instruments....................................................................10

3.1.4  Structure 11  

3.1.5  Covenants 11  

3.2  Exit strategies 12  

3.2.1  IPO 12  

3.2.2  Trade sale 13  

  I  

  3.2.3  

  Secondary sale 13  

3.2.4  Buyback 13  

3.2.5  Liquidation 14  

4  Factors for value creation 15  

4.1  Framework for value generation in buyouts 15  

4.2  Levers of value capturing: financial arbitrage 16  

4.3  Levers of value creation 18  

4.3.1  Primary Levers 18  

4.3.2  Secondary Levers 19  

5  Conclusion 20  

5.1  Critical assessment 20  

5.2  Outlook 20  

II

List of Figures

  Fig 1 European buyout characteristics 1  

  Fig 2 Buyouts in the life cycle of a company 3  

  Fig 3 Overview of buyout types 6  

  Fig 4 Exit channels chosen by BVK members (2005) 14  

III

List of Tables

Table 1 Structure of a buyout .............................................................................11

IV

List of Abbreviations

BIMBO Bought-in Management Buyout

EBO Employee Buyout

EDP Electronic Data Processing

ESOP Employee Stock Ownership Plan

IBO Institutional Buyout

IPO Initial Public Offering

LBO Leveraged Buyout

M&A Mergers & Acquisitions

MBI Management Buyin

MBO Management Buyout

MEBO Management and Employee Buyout

OBO Owner Buyout

PR Public Relations

P2P Public to Private

R&D Research and Development

UK United Kingdom

V

1 Introduction

1.1 Relevance of the subject

Originally developed in the USA, buyouts as a way of company acquisition gained more and more importance in Europe during the last years. They have not only experienced a growth in number but also in value as can be seen in Fig. 1. “The overall value of buyouts completed during the second quarter of 2006 rose to an unprecedented level, reaching ¼38,9 bn.” 1 Significant for the second quarter 2006 “was the increase in the number of large deals”. 2 There have been “six buyouts worth more than ¼1.65bn and 40 deals worth between ¼160m and

3 ¼1.65bn”.

4 Fig. 1 European buyout characteristics Concerning the number of buyouts in Europe one can clearly identify the United Kingdom (UK) as the largest market being followed by France and Germany. 46 of the total 162 buyouts in the second quarter 2006 have been concluded here. 5 Nearly the same picture can be observed by looking at the value of the deals. 1 Incisive Financial Publishing (2006), p. 6.

2 Incisive Financial Publishing (2006), p. 6.

3 Incisive Financial Publishing (2006), p. 6.

4 Source: Incisive Financial Publishing (2006), p. 7.

5 See Incisive Financial Publishing (2006), p. 9.

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