LBO vs. MBO are very two different breeds when it comes to M&As, no matter how small or large the transaction is. In our experience, the management team is the core of the company, as they have the inside knowledge and know-how in order to boost revenues and continue with the success of an asset. On the other hand, LBO still requires a strong and viable management team to run the company for profits and not into the ground. With an LBO, the sponsor should evidence some form of equity skin in the game in order to show it is as committed as the investor who is willing to support the transaction by investing his capital. I am more of a LBO person than an MBO person, as management teams usually become challenging in the long run.
What should foreign institutional investors consider when weighing the options of LBO and MBO?
We have some experience in buying out IT companies in our home country. Recently we have been researching an IT start-up in Silicon Valley and are very interested in an acquisition deal. As foreign institutional investors, we are weighing the options of an LBO (leveraged buyout) and an MBO (management buyout) and would like to get some advice from professionals.
I don't think these options should be measured in a vacuum. Before I'd consider an MBO, I'd want to evaluate the strength of the team. That may be an advantageous option, in that an American-led team may be helpful in getting approval from CFIUS, which is expected to have an even larger sway. I've worked on LBOs for significant portions of my career. If the company can carry the debt, that may make sense. Since acquisition of an IT company will need CFIUS approval, high leverage may have an impact on your ability to get approval. As the next phase has not yet begun, this is something to think about.