Case studyFrameworkDeals and M&AIncentivesActivism and governance
A management buyout puts the seller on both sides of the table
Barbarians at the Gate · 1993
The idea
When managers propose to buy the company they run, they are simultaneously the people who know most about its value and the people who benefit from a low price. Barbarians at the Gate plays the RJR Nabisco buyout as farce, and the farce is accurate about the structure: a chief executive bidding for his own company, a board forced to run an auction against him, and advisers whose fees depended on a deal happening. Every later rule about special committees, independent advisers and go-shop periods is an attempt to manage the conflict the film makes obvious.
In a management buyout the insider is the buyer, so the board's job is to make the market, not take the offer.
When it works
Any take-private, management-led bid, or fairness question in M&A and private equity interviews.
When it may fail
Management buyouts can be right for shareholders when nobody else will pay more, and the film's cast of villains makes it easy to forget that an auction answered the question.
How to use it
When you see a management-backed offer, ask three things: who on the board is independent of the bid, whether other buyers were genuinely solicited, and whether management's rollover equity means they win more from a low price than shareholders lose. Southeastern's letter on Dell is the worked example.
Where it came from
Film Barbarians at the Gate · 1993
What the source says. The RJR Nabisco buyout played as farce, and still the quickest way to understand why a management buyout creates a conflict of interest.
Connected ideas
Puts it to work
A sum of the parts shows what a take-private bid is paying nothing forValue each part a bidder is acquiring; what the bid leaves at zero is the argument against it.
Takes it further
An auction is won on certainty and speed as often as on priceA seller sells certainty of closing as much as price; a bidder who offers more of it can pay less.
Says something similar
An activist turns bidder when the public market has not workedA take-private proposal is a complete case: the public record that failed, the price, the premium, the financing and the timetable, in that order.
Concepts
Put it to work on L3VLUP
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