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MBA7122
Types of LBOs differ in the following respects. Whether the incumbent management of the target of the buyout is part of the team initiating the buyout and invests in the equity of Newco. Whether the target firm is a company listed on a stock exchange and includes the public, both institutional and individual, investors as shareholders. Whether the management team consists of incumbent target management or it includes new managers from outside or a mixture of both.
Investor Buyout
The LBO sponsor buys the target without involving the target management. In some cases the management itself may be attempting a MBO with the support of another LBO firm. Example In the LBO of RJR Nabisco, KKR was pitted against the MBO proposal led by the then CEO, Ross Johnson. Thus the management was excluded from the IBO.
The management buyout initiative, may come from the targets incumbent managers who then arrange the support of a private equity firm. The parent may also run an auction for the target and the target management then teams up with the winning sponsor.
What drives managers to become owners of the businesses they have run under the direction and control of a parent?
TYPICAL MBO
Opportunity to control own business; Long term faith in company; Better financial rewards; Opportunity to develop own talents; Absence of head office constraints; Fear of redundancy; Fear of new owner after anticipated acquisition
MBO
Financial and investment constraints imposed by the head office in a group may result in under-exploitation of the full potential of a business, and may lead to frustration among the divisional managers.
Incentives in MBO MBOs have been structured to include an incentive for the management to achieve or exceed agreed levels of performance after the buyout. Such an incentive is known as ratchet. Three types of ratchet related to targets based on: (a)Profit level; (b)Time of exit and value achieved on exit; (c)Debt repayment.
Institutional (Investors) Rights in case of a MBO The inclusion of a provision which compels a corporate shareholder to sell its shares if there is a change in control of the shareholder The inclusion of tag along provisions (to ensure that if an offer is made to the majority shareholder for its shares, the minority shareholders can elect to sell their shares to the same purchaser on the same terms) The inclusion of drag along provisions (to ensure that if a majority shareholder wishes to sell its shares then it can force the minority to sell their shares to the same purchaser on the same terms)
INDIAS FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it the positive power of capital
Company Website Business Sector www.nitrexchemicals.com Industrials
Country of Operation
Market Investment Status Investment Type Date of Original Investment Office
India
South Asia Current Portfolio Buyout Capital 2004 Mumbai, India
INDIAS FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it the positive power of capital
Their needs - ICI India was looking for a buyer who would not only ensure the continuity of the business in line with their own values but who would also take an employee-friendly approach to the buyout. The incumbent management team of the nitrocellulose division had extensive experience and a deep understanding of the business, and a strong vision for expanding the business internationally.
Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)
INDIAS FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it the positive power of capital
Changes in the market landscape offered up opportunities to develop the business through organic growth and acquisitions and the management team wanted a backer who would provide more than just money. They needed a backer with unrivalled business expansion experience and the international business exposure to help them deliver on their vision.
Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)
INDIAS FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it the positive power of capital ACTIS SOLUTION Actis identified strong synergies between the vision of the management team and the value that we could create for the business. Actis experience of working with corporate vendors also enabled them to navigate effectively the often sensitive process of spinning out a business by building strong relationships with both the vendor and the management team. In March 2004 the purchase of the nitrocellulose division by Actis and the management team was completed for an upfront payment of US$13.8million and Nitrex was created.
Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)
INDIAS FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it the positive power of capital Actiss added value - Actiss experience of negotiating and executing management buyouts from corporate vendors enabled us to complete the deal in just 75 days. This enabled the management team to communicate positively and maintain strong relations with the staff of over 100 employees who have historically played a key role in improving production processes within the business. The swift execution of the deal also enabled the management team to manage effective communications with key customers and further strengthen their relationships through what can often be unsettling times for all stakeholders in the business.
Source: http://www.act.is/732,42/nitrex-chemicals (Official website of Actis)
INDIAS FIRST MBO by ACTIS (Private Equity Player) ACTIS calls it the positive power of capital
Since investing, Actis has provided critical support for Nitrexs expansion options, acquisition plans and divestment. Actis sourced and led the search for acquisition opportunities by identifying suitable targets and helping management negotiate debt packages to complete the acquisition successfully. Actis supported the management in their expansion plans by providing strategic support on the plans to add a green-field plant. On the corporate governance side, Actis helped build a solid board by identifying suitable Non Executive Directors with strong industry experience and also assisted in improving the internal systems and health and safety practices, including pollution controls.