The rise of Management Buyouts in INDIA

CA Maneet Pal

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http://www.capasricha.com/

Management Buy-Out is a form of acquisition that is purchase of a company by another; in this case the company’s existing managers acquire a significant part or whole of the company.   

Well as in most circumstances the management will buy out all the outstanding shareholders and then take the company private, the reason is because it may have the feeling the business could expand and it will be in the betterment of the company if they controls the ownership. And it usually requires substantial support from the bank or venture capitalists or other outside entities.

With the emergence of private equity players agreeing to risk and invest in the purchasing of such companies a rising trends has been in this perspective. Be it foreign, domestic or family run business everybody has shared this limelight. Various bids arriving from across the globe has opened a new possibility for the managers who had ambitious dreams to own and work for the success of their companies.

Back in 2007 Blackstone Group agreed to buy an Indian company Intelenet Global services Ltd., Blackstone owned about 80% of the company, the deal was said to be of a about $200 million. India ranked 16 among the with most Private Equity deals in 2007. With the number of family business coming up drastically and domestic companies splitting up the Management Buyouts have entered with arms wide open. PE brings a lot more focus into a company. They also bring corporate governance into companies, which are family-run businesses, by converting them into management-run businesses.

Management Buyouts in today’s era

Some of the buy outs can be simple, straight and advance while others can be rather of a complex nature. The main thing here is the Managers see a profitable business for which they put some of their money to gain owner and equity returns for their invested money. However what amount of sum is considered acceptable varies and it depends as to what extent the management puts in. The outsiders such as bankers accept a considerable promise from the management and this sum may not be very large as well.  

Financing Management Buyouts

There are three major ways to finance management buyouts in India:

1)      Debt Financing

In management buyout the company’s managers become owner but they don’t have that much amount of money to acquire the company. Therefore they look forward to outsider investors like banks. Banks usually do not lend such huge amount of money as it’s always a risky transaction on their behalf.  The management teams are asked to raise a significant proportion of the amount through their own funding and then the banks lend them the remaining amount of the capital.  

2)      Private Equity Financing

If in any circumstance the banks refuse to lend the required amount of money then the company will look forward to raise its capital through private equity funding. Equity investors will fund the company by either investing in the company’s stake in return for shares or can finance the same amount as debt to the company. Although the investors choose this of the two of the above is entirely their decision. But since debt is backed up with security and is not risky unlike equity, many will prefer debt.

Also the investors will want the managers who are the owners to make a considerable amount of investment. This will lead to the managers having a small portion of the company.

However the investors may ask the company to agree to certain terms and conditions in which the company would be run. This will ensure that the management works towards getting maximum returns for their investments on the contrary subject to the small goals of the investors the management may will have larger goals for the company. And this compliance may lead to the decisions of the management being restricted or rigid.

3)      Seller Financing

In some situations is possible that management and the original owner of the company agree to deal whereby the buy out will be financed by the seller. The price paid will be over the years of the company profits. But in this deal there are disadvantages to the seller, he must wait to receive his money which is dependent on over the years of company profits and he loses control over the company.   

The relatively closer term “Management Buy in”

When an outside management team purchases an ownership in the company’s stake and replaces the existing management team in a commercial act. It is basically known as management buy in. this type of action may arise when the outside team feels that the firm’s products can generate higher profits than what it generates in the current state.   

In this growing economic and corporate world there exists many management teams who buy in small or unprofitable companies if they feel these firms can run into good profits if the activities are carried on by the new management.

The Difference

The core differences between “management buy out” and “management buy in” is that in management buy out the managers of the same company invest in the company’s capital and become owners of the company and in management buy in the outside management team purchases the company and becomes owners, replaces the existing managerial team and runs the company as per their plans.

Buy in management buy out (BIMBO) – The combination

BIMBO is a combination of buy in management and management buy out. In buy out the existing managers acquire the company and become owners of it and in management buy in the outside investors replace the existing management and the business. This term came into existence in 1990.  

Conclusion

Management buyout is a term which enables the management section of an organization to emerge out of a restricted progress arena to an open space where the management discovers its leadership skills and works with utmost dedication and motivation. It’s the management that sees the true potential of the company and knows how to help reach those targets in future. Just like every other body in the universe MBO’s have their share of pros and cons but given a chance MBOs have flourished with time and that’s the core reason of the rising trends in India. Since 2007 MBOs have gained stable momentum and till date numerous deals have been cut and many small and large scale firms have benefited from it.