Funds galore for LBO prospects | Tax snags of a global buyout | Europe is the next frontier | Some examples of recent MBOs | UK buyouts grow in complexity | Spawn of an era: specialist firms | Warnings fail to dim LBO dazzle
In 1971, Kohlberg, Kravis Roberts led the management buyout of a shoe company called Cobblers Inc. Six months later, the chief executive officer committed suicide. After failing with two successive attempts to replace him, KKR cut its losses and sold off the shoe company in pieces. The lenders recovered their money, but equity investors lost $400,000.
This early failure underlines a basic principle: strong and committed management is the lynchpin to any successful buyout. "The quality of management is more important than any income statement or balance sheet,' declared Richard Urfer, chief operating officer of Chase Investment Bank.
Equally fundamental is the involvement of managers as owners. One of the main conceptual foundations of the buyout business is that managers who own their companies work harder and more productively than those who don't. This can sometimes produce results that are almost embarrassing, when sales and earnings improve dramatically for no apparent reason, soon after managers buy a company from its former shareholders.