LBO vs MBO
Though to someone outside the corporate world, terms like LBO and MBO may look like outlandish, these are commonly used words in business circles. While LBO refers to Leveraged Buyout, MBO is management Buyout. While there are many who feel that MBO is totally different from LBO, experts say that MBO is a special case of LBO with not an outsider but internal management taking over effective control of the company. This article attempts to make clear the differences between LBO and MBO.
What is LBO?
When an outsider, typically a person having interest in controlling a company, arranges money to buyout sufficient stocks of the company to be able to control equity of the company, it is referred to as Leveraged Buyout. Usually, this investor borrows a very high percentage of money which is returned back by selling the assets of the acquired company. The money usually comes from banks and debt capital markets. History is replete with instances of LBO where people with no or very little money acquired controlling powers in a company through LBO. What is surprising is that the assets of the company being acquired are used as collateral for the money being borrowed. To raise money, the acquiring company issues bonds to investors that are risky in nature and should not be considered as investment grade as there are substantial risks involved in the procedure. In general, the debt portion in LBO ranges from 50-85% though there have been instances when more than 95% of the LBO was carried out with debt.
What is MBO?
MBO is Management Buyout which is a type of LBO. Here it is the internal management of the company instead of outsiders that try to buyout the control of the company. This is usually resorted to make the managers more interested in improving the affairs of the company as they become equity holders and therefore partners in profits. When MBO occurs a publicly listed company becomes private. MBO affects restructuring of the organization and also assumes significance in acquisitions and mergers. There are people who say that MBO is these days being utilized by managers to buy the company at a lower price and then affect changes to increase share prices to benefit in a huge way. The supporters of this view say that managers try to mismanage reducing the output and thereby stock prices. After a successful MBO where they gain control at a cheap rate, they govern the company in an efficient manner to make the stocks rise abruptly.
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In brief: LBO vs MBO • LBO is leveraged buyout which happens when an outsider arranges debts to gain control of a company. • MBO is management buyout when the managers of a company themselves buy the stakes in a company thereby owning the company. • In LBO, the outsider puts his own management team in place whereas in MBO the present management team continues • In MBO, management puts up its own money to gain control as shareholders want it that way.
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