Mbo vs Mbi vs Sell off

You are quite right in saying that ultimately the existing owners should not really care who takes over the business. The sort of factors that are likely to make the idea of a MBO attractive to the current owners is that it is usually much faster to arrange (they don't have to go round searching for buyers), it can be kept more confidential (they don't have to advertise the fact that they are wanting to sell some or all of the company in advance - existing customers and suppliers might be worried if they think the company is needing to be sold, and so business could be affected while trying to find a buyer). If it is the existing management who are buying the company then they will hopefully find it easier to arrange the necessary borrowings (because the lenders have confidence that they know the business) which can result in getting a higher price. If it is just part of the company that is being sold, then there might still be trading with the division which is likely to 'work better' if it is with existing management. If the selling company is retaining a stake in the new company, then it is certainly in their interests to want to sell to people that they are confident will be able to run the business well.

Hmm that makes a lot of sense now thanks, I want to confirm my understanding on the following, please correct me where i am wrong. In either Mbi or Mbo the share capital figure of the company, remains unchanged, the new mgt simply gets existing equity shares by paying for them, and as u pointed out in your last paragraph, the selling company may retain some of the equity to the division they Mbo'ed. but in case of Demerger, the the proportion of equity pertaining to demerged division is removed from company's books.

No, that is not correct. A new company is formed which buys the old company (or a division of the old company). The managers taking over will subscribe to shares in the new company and the new company will raise a lot of long-term debt finance. The total money raised is used for the purchase. (It might be that the owners of the old company subscribe for some of the shares in the new company, but that doesn't have to be the case,) As far as the old company is concerned, if the whole business is being sold then the company will be liquidated, the shares cancelled, and the money received is used to pay off any loans etc and then distributed to the old shareholders. If it is just a division being sold, then the old company's shares remain and the proceeds from the sale belong to the old company.

Hi John, could you plz reiterate your explanation as to which refers to demerger and which to Mbo. Upon carefully reading your answer, its the same thing i wrote and was getting assurance upon, although u provided additional details, which is handy The breakdown i was seeking is concentrated on two folds as what will happen to shareholders and company, but i was concerned about the company's perspective. i.e in a demerger owners are same but company its spilt into two. thus original company's share capital, has been transferred to new company .whereas in a MBO or MBI, specifically when a division is being bought , nothing impacts the share capital in the company's book, however shareholders have changed from existing owners to new mgt of the division sold. "If it is just a division being sold, then the old company’s shares remain and the proceeds from the sale belong to the old company." The above statement of yours refers to MBO or MBI right ? The first paragraph refers in your comment above refers to Demerger?

The original share capital is not transferred to a new company on a demerger. The part of the company being demerged is either sold to another company (in which case the proceeds go to the original company. Alternatively a new company is created and the shares in the new company are given to the shareholders of the original company - so the shareholders now own shares in two companies.

clear

Great :-)