Leveraged Management Buyouts: Causes and Consequences
By Yakov Amihud
2002/07 - Beard Books
1587981386 - Paperback - Reprint - 282 pp.
A series of incisive, analytical essays on the causes and consequences of management buyouts by financial economists, lawyers, dealmakers, and principal policymakers.
Leveraged management buyouts have assumed an important role in the restructuring of corporate America. This book is intended to expand the reader's understanding of the causes and consequences of this phenomenon and to contribute to public debate on the appropriate policies for legislation and regulation regarding management buyouts. Included are characteristics of firms that engage in management buyouts, descriptions of how management's performance changed in selected firms that had undergone management buyouts, and findings on the performance of these firms after realizing value increases.
From Turnarounds and Workouts, October 15, 2002
This book is the outcome of a 1988 conference organized by the Salomon Brothers Center for the Study of Financial Institutions at the Stern School of Business of New York University. It consists of 12 papers presented at that conference, papers that represented the first ever in-depth study of leveraged management buyouts (MBOs).
MBOs were a hot topic in the late 1980s, as a rapidly growing reorganization phenomenon closely tied to junk bonds. Debate over MBOs centered around two uncertainties: fairness to shareholders and possible conflicts of interest between management/acquirer and shareholders, and doubts about the future performance of companies acquired through MBOs. The authors' objective was to expand the understanding of academics, practitioners, and policymakers of the causes and consequences of MBOs and to contribute to data on appropriate policies for legislation and regulation regarding them.
The first of three sections reviews characteristics and consequences of MBOs. The first chapter, by the editor, Yakov Ahihud, surveys the empirical evidence on the effects of MBO announcements on stock and bond prices. He considers arguments for and against mandating an auction of the MBO target firm and analyzes points of view about and evidence on conflicts of interest between management and shareholders. He evaluates motivations for MBOs, such as tax benefits and improved incentives. The second chapter compares and contrasts the characteristics of corporations subject to MBOs with other corporations. Two authors then look into performance of target firms before and after buyouts. One interviewed CEOs of corporations acquired by MBO about their motivations for and changes in managerial strategy after the MBO. Both authors found that buyouts were followed by significant improvements in firms' performance.
The focal points of the second section were legal and tax issues. The first chapter discusses the role of management in MBOs, potential conflict with shareholder interests, and the matter of fairness. They analyzed court decisions and the proposed remedies, and evaluated the legal consequences of various business practices applied in MBOs. The second chapter discusses the sources of tax benefits and various financing methods, with a focus on employee stock option plans. The final chapter concluded that other reorganization strategies could yield the same tax benefits as MBOs.
The final section presents a lively debate on policy and legislative options to resolve issues that arise from MBOs. Authors include a U.S. congressman, an SEC commissioner and professors from Harvard Law School and the School of Law at Stanford University. Their viewpoints are discussed compellingly and are often in opposition. One author avowed that MBOs were already over-regulated while another argued for the need of an auction for the corporation once an MBO proposal was announced.
Opinion on the two main questions addressed by the book was varied. With regard to fairness, while shareholders received an average of 30-40 percent over market price for their shares, some were prevented from reaping the benefits of shrewd post-buyout strategies. With regard to future performance clouded by heavy debt, some MBOs failed, those that "may well have encountered difficulties as a result of the financial pressures imposed by leveraged transactions." More were successful, however, becoming "reinvigorated companies that have regained a sharp competitive edge as a result of an MBO." Anecdotal evidence suggested the successes were due to management's desisting from "managing so they can get to the country club by 3 pm."
Papers presented at a conference held at the Leonard N. Stern School of Business, New York University, on May 20, 1988, and sponsored by the Salomon Brothers Center for the Study of Financial Institutions. The 1989 edition of this proceedings volume was published by Dow-Jones-Irwin. Academics, legislators, and practitioners explore the phenomenon of a company's management buying it, and possible divergence of interests between the buyers and other stockholders. They consider the effects of such buyouts on a company's performance, unique tax considerations, legal issues, and regulatory concerns.
Yakov Amihud is Ira Leon Rennert Professor of Entrepreneurial Finance of the Stern School of Business, New York University where he has been teaching since 1990, and concurrent holds a research professorship in Finance. He obtained his Bachelor of Social Science degree from Hebrew University (1969); Master of Science in Business Administration from New York University Graduate School of Business Administration (1973) and his Doctor of Philosophy in Business Administration from the same institution in 1975.
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