Equity financing alternative methods
Equity financing alternative methods will be further analyzed in this article. Similarly, this article is a continuation of the “types of equity financing method” that we have discussed earlier. However, we will go through some of the equity financing related areas such as share repurchase, Employee share ownership program, Management buyouts, Leverage buyouts.
Share repurchase
This is one of the best methods chosen by public companies when they are going to private. Share repurchase provides a way of withdrawing from the share market, and the company buys back all of its publicly held shares.
Benefits of share repurchase/buybacks
- This provides a means of spending the surplus cash.
- As a result of buyback earnings per share and gearing will rise. EPS raises because the earnings of the company will be disbursed under a small number of shares.
- Safe from takeovers by other companies.
- Readjustment of the company’s equity base for appropriate level.
Disadvantages of a share repurchase
- It is tough to arrive at the price which is beneficial to both company and shareholders
- This will imply that the company is not able to manage their funds properly.
- Shareholders of the companies may be taxed on capital gains.
ESOP / Employee share ownership programmes
Employees of the companies will offer them with shares instead of the remuneration. Above all ,there are advantages and disadvantages to this method. Moreover, clauses in ESOPs may be locked, requiring employees to work for a specified period (e.g., three years) before they are entitled to sell their shares.
Benefits of ESOPs
- If the employees are also the shareholders of the company, then they will be motivated.
- ESOPs will lock the key employees to stay longer with the company.
- Since there is no cash outflow, the company can effectively manage the forgone salary.
Drawbacks of ESOPs
- When allowing this system to accumulate shares for the employees, EPS for the existing shareholders may dilute.
- Increasing employee risk.
Management Buyouts (MBO)
MBO refers to a situation where the company’s management will buy the company from its existing shareholders.
Management buy-in (MBI)
A management buy-in (MBI) is the purchase of the company’s share by a financial intuition. Private equity firms will take initiation in these types of operations.
Buy-in management buyout (BIMBO or MBOIN)
BIMBOs Incorporate characteristics of both management buyouts and buy-ins.
However, the buyout method has two objectives. From the seller’s side, it will be a kind of divestment of their investment. Whereas form the management side “Buyers side,” this will be a kind of a method of setting up in business for themselves.
Let’s look at why the BOD of a large company may agree to an MBO ….
- The subsidiary may be different to the group’s mainstream activities.
- MBOs are a method to sell off their loss-making subsidiary.
- You have been given the best offer price for the buyout.
Moreover, there are three parties directly involved in the buyout of a company.
- Management Team
- Directors
- Financial Backers, e.g., Venture capitals
Venture capital firms
These firms are more likely to grant funds for the MBOs, Management buy-ins, and corporate projects than the more risk projects. However, these firms may require a 20% -30% equity stake of the investing company. Unlike other investors, venture capital firms, when investing in a project, they will set an exact exit date for the investment. So the possible exit methods that they will look into will list below,
- Flotation
- Sale of the company
- Sale of the share to another investment company
Surprisingly, there are several factors to consider why the MBO is performing than other businesses.
- A favorable buyout price having been achieved.
- Employees are motivated and dedicates.
- There will be a saving in overhead costs.
- Since the small number of people who manage the company, decision making is rapid.
However, there are some problems with MBOs that also come into consideration.
- Sometimes the management team may not have the required experience. ( Management skills and financial accounting knowledge )
- Tax and legal complications
- Inadequate finances
- Loss of key employees
Leveraged buyout / LBO model
A specially established private company acquires a publicly quoted company in LBO. However, the private company finances the acquisition with significant borrowing. Most management purchases are leveraged purchases.
Advantages of leveraged buyouts
- Savings on the listing requirements.
- Company will protect from the volatility of share prices and earings.
- Always the shareholders are more closer to the management.
- Less vulnerability of takeovers.
Disadvantages of leveraged buyouts
- Loss of the ability to have the shares publicly traded.
