A management buyout (MBO) occurs when a public company's management team purchases the company from its shareholders. The substance of the transaction typically is a leveraged buyout. The form can be either a merger between the company and an acquisition corporate shell set up by the management group or a two-step acquisition in which management first makes a tender offer and then freezes out any remaining shareholders with a merger. Management often will seek a private equity fund to serve as a financial partner.
The transaction can produce significant gains, but it also poses a serious conflict of interest. Managers are simultaneously acting as agents of the shareholders and as buyers. In effect, they are on both sides of the deal. In addition, because management typically will have private information, some regard MBOs as simply a very large insider trading transaction.
This video explains how MBOs work and provides an overview of judicial review.
