February 27, 2015 6:36 pm
Management Buyouts: Trust issues
The dilemma is
this: the boss has the inside perspective on the value of the company
a typical company, investors wonder if the chief executive is competent. A
tougher question emerges when the chief owns a big chunk of the shares: is
the boss trustworthy? This week the founder of electronic music festival
SFX Entertainment, Robert Sillerman,
offered to buy out the 60 per cent
of the company he does not own, for $4.75 per share. The shares traded at
$12 at the end of 2013. Still, the offer may well succeed — the bosses of
Dole Food and Dell both won approval
for their recent buyouts.
The dilemma with management buyouts is this: the boss has the inside
perspective on the value of the company. Knowing where the bodies are buried
puts them in a position to exploit the ignorance of Joe Public. Aggrieved
shareholders of Dole Food claimed that its chief executive, who owned a 40
per cent stake,
took advantage of a lull in the
share price. In the case of Dell, the recent strong rally in the shares of
HP — a very similar business —
suggests Mr Dell timed his purchase well.
Shareholders have some protection against exploitation. Independent
directors can negotiate on the behalf of public shareholders. Deals can
require a majority of unaffiliated shareholders to vote in favour.
Management buyouts often face a higher standard of review in deals in case
of a legal challenge. Increasingly, shareholders demand “appraisal
rights”, where a judge decides if the deal price was fair.
Still, companies with big insider shareholders do not
necessarily underperform in
aggregate. A 2012 study by ISS found single-class “controlled” companies
(where control is defined as ownership of 30 per cent of the shares)
outperformed non-controlled companies as well as dual class-controlled
companies. The theory behind investing in companies where the chief
executive has a big stake is that management and shareholders have the same
interests. That is not always how it works in practice.
Email the Lex team at
© The Financial Times Ltd 2015