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Financial and strategic implications of mergers and acquisitions
5.3 Exit routes
In an MBO, the financiers will be keen to identify a potential exit route at
the time the MBO takes place.
Exit routes for debt holders
Debt finance will normally have a specified repayment date – clear exit route as
long as the borrowing company has performed in line with expectations and can
afford to repay the debt as planned.
Exit routes for equity holders
Most common exit route is the sale of the shares to another investor.
Trade sale
If the MBO company receives an offer for all its shares from another
company, the financiers will be able to realise their investment. However, in
a trade sale, all the shares are normally acquired by the bidding company,
so the management would have to sell their shares in their own company
too. They may not be happy to do this, because the appeal of an MBO to
managers is that they will own their own company rather than have to
report to other shareholders.
IPO (Initial Public Offering)
An IPO or flotation gives the financiers who want to sell their shares the
chance to do so on the stock market. If the managers want to keep hold of
their shares, they will be able to do so. The problem with an IPO is that the
company will have to satisfy certain stringent criteria in order to join the
stock exchange, and there will be significant costs associated with the
listing. After an IPO, the shares will be freely traded, which should increase
their marketability and hence their value. On the other hand, the company
becomes much more susceptible to takeover when its shares are listed.
Independent sale to another shareholder (perhaps the managers)
The managers could try to increase their shareholdings in the company by
'buying out' the other financiers. This would be expensive, but if the
managers could afford it, it would prevent other external shareholders
buying the shares and having a say in the running of the business.
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