Buy‐ins, Buy‐outs, Active Investors and Corporate Governance

Abstract

This paper examines corporate governance in management buy-outs and buy-ins and in particular considers the problems faced by venture capitalists as active investors. Evidence is presented based on large scale surveys and case studies. The study suggests the importance of achieving a balance between the independence of venture capitalists as monitors of management and the need for cooperation in their relationships with managers in buy-outs and buy-ins. The study also questions the adequacy with which financiers as active investors have taken account of the differing attributes of each type of transaction, particularly in relation to access to information and the roles of management. The costs of closely monitoring smaller investments may often exceed the benefits, which helps explain why the greater control found in buy-ins is more likely to be indirect rather than greater board representation. The evidence suggests the need for a flexible approach to governance under which the forms adopted take account of the specific circumstances of a particular enterprise.

Leveraged Public to Private Transactions in the UK

“…Public controversy over increased hostility in transactions that year induced the Panel on Takeovers and Mergers to adopt new rules regarding the procedures in PTPs (Wright et al,1991). As in the US, the sudden drop in deals after 1989 made it seem as if the public to private transaction had already outlived its short life.…”

“…2 In a typical UK MBO, the incumbent management seeks institutional support from private equity firms to purchase a major stake in the firm and to fund the transaction which aims at taking the firm private (Wright et al, 1991). IBOs (also called Bought Deals or Finance Purchases) are deals where the bidding group consists solely of institutional investors and private equity houses.…”

High-tech management buy-outs

“…This may suggest that financiers will seek to structure transactions with lower degrees of leverage (Norton and Tenenbaum 1992). On the other hand, venture capitalists may be unwilling to extend their equity contribution significantly as this may create difficulties in achieving target rates of return; indeed comparisons of management buy-outs and the riskier category of buy-ins finds no significant differences on average in terms of institutional equity (Wright et al 1996). To the extent that financing structures reflect any perceived greater risk of high-tech buy-outs, this may emerge in a greater use of mezzanine debt.…”

“…A number of studies have suggested that the incentive and control mechanisms in buy-outs have contributed to a stimulation of restructuring and entrepreneurial behaviour (Phan and Hill 1995, Zahra 1995, Wright et al 1996. A number of important post-buy-out differences in these areas may be expected to emerge between high-tech and nonhigh-tech buy-outs.…”

Leveraged Buyouts: A Survey of the Literature

“…In some IBOs, the continuing effort of the incumbent management team is central to the success of the offer, while in other cases the management team is removed. For the typical IBO in which management stays on, it is customary to reward managerial performance with equity stakes in the new private firm via so-called equity ratchets 2 (Wright, Thompson, Chiplin and Robbie (1991)). In terms of equity ownership, what…”