1. A buyout involving the target firm’s current management is called a management buyout. In what way do these type of deal represent agency conflicts between managers and shareholders? What board procedures can be put in place to mitigate such conflicts? How can activist investors help mitigate such conflicts?
Solution
A management buyout (MBO) is a form of acquisition where a company\'s existing managers acquire a large part or all of the company from either the parent company or from the private owners.
Though it is considered that post MBO, the commitment of the managment towards the company increases. However it results in agency conflicts between managers & shareholders as it leads to moral hazard as management takes the risk while shareholders pay its consequences. Also there could be cases where the management subtlely forces the stock price downwards by releasing adverse information, delibrately going ahead with projects against public preception, etc.
VarÂiÂous strateÂgies may be used by investors to move manÂageÂment board memÂbers away from parÂticÂiÂpatÂing in the deal on both sides. The most freÂquent is to form a speÂcial purÂpose vehiÂcle (SPV) for an MBO. ManÂageÂment board memÂbers conÂtribute funds to the SPV proÂvided for a purÂchase of shares in the comÂpany they manÂage. The remainÂing funds come from other instiÂtuÂtions financÂing the MBO (mainly banks and priÂvate equity funds). In negoÂtiÂaÂtions with the tarÂget comÂpany, repÂreÂsenÂtaÂtives of such instiÂtuÂtions often act on behalf of the SPV instead of as managers.
HavÂing many parÂticÂiÂpants in the deal reduces the risk that manÂageÂment board memÂbers will act under a conÂflict of interÂest, facilÂiÂtate getÂting more funds to finance the underÂtakÂing, and increase the chance of success.
.
1- A buyout involving the target firms current management is called a.docx
1. 1. A buyout involving the target firm’s current management is called a management buyout.
In what way do these type of deal represent agency conflicts between managers and
shareholders? What board procedures can be put in place to mitigate such conflicts? How can
activist investors help mitigate such conflicts?
Solution
A management buyout (MBO) is a form of acquisition where a company's existing managers
acquire a large part or all of the company from either the parent company or from the private
owners.
Though it is considered that post MBO, the commitment of the managment towards the company
increases. However it results in agency conflicts between managers & shareholders as it leads to
moral hazard as management takes the risk while shareholders pay its consequences. Also there
could be cases where the management subtlely forces the stock price downwards by releasing
adverse information, delibrately going ahead with projects against public preception, etc.
VarÂiÂous strateÂgies may be used by investors to move manÂageÂment board memÂbers
away from parÂticÂiÂpatÂing in the deal on both sides. The most freÂquent is to form a speÂ-
cial purÂpose vehiÂcle (SPV) for an MBO. ManÂageÂment board memÂbers conÂtribute
funds to the SPV proÂvided for a purÂchase of shares in the comÂpany they manÂage. The
remainÂing funds come from other instiÂtuÂtions financÂing the MBO (mainly banks and
priÂvate equity funds). In negoÂtiÂaÂtions with the tarÂget comÂpany, repÂreÂsenÂtaÂtives
of such instiÂtuÂtions often act on behalf of the SPV instead of as managers.
HavÂing many parÂticÂiÂpants in the deal reduces the risk that manÂageÂment board memÂ-
bers will act under a conÂflict of interÂest, facilÂiÂtate getÂting more funds to finance the
underÂtakÂing, and increase the chance of success.
