In many cases, the institution acquires a majority stake and the incumbent management buys a small stake of the target company. However, the entire target company can also be taken over by the financial investor who then hires a group of managers to run the company.
The institution buys the company either on the stock exchange (going-private buyout, public to private) or directly from the vendor. In many cases the financial buyers use a high percentage of debt financing in order to purchase a company (leveraged buyout [LBO]).
The main goal of the investor is to increase the profitability of the company, thus raising the market value. Core sources for improvement in the operating performance is a decrease in the capital expenditures, as well as management incentives and agency costs effects. By means of buyout specialists who structure the transactions, monitor and control the management teams, agency costs can be reduced and the operating income increased.
The buyout firm seeks to harvest its gains within a 3–5 year time period by selling the company’s shares. Among the most common exit strategies are the sale to a strategic buyer (trade sale), an initial public offering (IPO), or a sale to another financial institution (secondary purchase).
|Institutional Buy Out|