Question

Question Two

1. Discuss the benefits and drawbacks, to the shareholders of a company, of a public listing on a stock exchange compared to private equity finance as a way of disposing their shares.

10 Marks

2. Discuss circumstances in which a Management Buy - Out (MBO) might be an appropriate form of divestment from a business. 10 Marks

3. Explain the factors the venture capital fund is likely to consider or impose when financing the MBO 10 Marks

Answer 1

Answer 1

1. If shareholders sell their shares on stock exchange, they may have chance to buy these shares again in future. However, private equity holder may not ready to sale those shares back.

2. Shares can be sold in small quantities in case of stock exchange, whereas private equity firm may not be interested in buying in small and fragmented quantities.

3. Private Equity firm may offer better price for the shares as compare to price on stock exchanges as private equity firm may study and analyse the business in a better way.

4. Selling through stock exchange is costly as compared to sale to private equity firm.

5. Private equity firm may acquire substantial share holding, creating the controlling power of the company. Shareholders may loose controlling power.

Answer 2

The management may have detailed and confidential information of the company's business and understands its business properly. The management team should be confident about the future prospects of the business.  This will involve analysing the performance of the business and drawing up a business plan (products, markets, required new investment, sources of finance, etc.) for future operations

The success of any MBO will be greatly influenced by the quality of the management team. It is important to ensure that all functional areas (marketing, sales, production, finance) are represented and that all managers are prepared to take the required risks

Answer 3

Typically venture capitalists will be prepared to advance funds for five to ten years, and will expect annual returns on their funds of 25% or more (compounded and received at exit, rather than annually). They normally expect to take one or more seats on the board of directors (but not a majority).

venture capitalists often provide their funds as a mix of equity and debt, in order to give themselves security (the debt) while allowing them to participate if things go well (the equity).