Instead of a takeover by an external company, companies may be bought by a team of managers who take the company private. In other words, the company continues as a separate entity but it withdraws its stock market quotation.
The offer to buy all the shares may come from the existing executives of the target company. This is known as a management buyout (MBO) because the existing management is buying out all the other shareholders. The logic behind this type of deal is that no one should understand a company better than its managers – if they think the company is undervalued in the market they might be tempted to launch an MBO.
Sometimes the offer comes from a set of managers who are unconnected to the company and who think they can run it better than the existing executives. This is known as a management buy-in.
Very rarely, the proposed new team comprises some existing and some new executives – which a City wag dubbed as a bimbo (or buy-in/management buyout).
All these situations are nowadays generally referred to as MBOs and I shall use this term irrespective of where the new bosses are coming from.
The management will almost certainly be getting financial backing from another source unless one of them is very rich. Banks may provide a loan or, more likely, venture capitalists are providing the cash.
Venture capitalists are groups of wealthy individuals who – among other activities – specialise in buying companies that they feel are undervalued by the stock market, so the immediate suspicion with any MBO is that someone is trying to get your company on the cheap.
Existing management should know the company inside out. If they see hidden value there, shareholders are entitled to wonder why that value has not been unlocked for the benefit of all shareholders already.
Those directors who are not going to be involved in the company after it has been taken private are referred to as independent directors. They will usually be the non-executives. Their role will be to represent the existing shareholders in the target company and not to side with any executives involved in the offer.
Since the independent directors have nothing to gain from the MBO – indeed, they will be losing their directorships and the fees they are paid – they can attempt to extract as high a bid as possible on behalf of the ordinary shareholders.
Some independent directors are rather better at this than others and there have been occasions where they have dug their heels in and refused to recommend acceptance of an MBO.
On other occasions they may lack a little spine in standing up to the executives. They have, after all, sat round the same boardroom table month after month and may have too cosy a relationship to start fighting.
In these circumstances your fate is often in their hands.
One factor that may help is that if the managers try to get ownership of the company on the cheap it is possible that another bidder will step forward and offer more. Don’t count on it, but it does happen.
Another possibility is that major shareholders may revolt and vote down the MBO even when it is recommended by the independent directors. An MBO requires a vote of shareholders at an extraordinary general meeting (EGM).