A management buyout (“MBO”) involves the purchase of an existing business by its senior management team. It has proved itself to be an attractive vehicle for management, who can accumulate wealth in the form of an equity participation in their company. This note looks at salient features of MBOs, such as how they are structured and financed, and how equity is allocated. It also examines how to evaluate an MBO candidate to guage whether it has potential for success.

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This note provides relevant background for the matermatic case below.

Simon Stockley, SA Home Loans’ CEO, was a lawyer by education but an entrepreneur by nature; his colourful, nonconformist socks epitomised his character. The first person in South Africa to build a business based around the concept of securitisation, he had taken just five years to break into South Africa’s capital market and take on South Africa’s major banking institutions.

In early July 2012, the United States Commodity Futures Trading Commission (CFTC) filed a federal lawsuit against Peregrine Financial Group Inc. (PFG), a futures trading firm, and its founder Russell Wasendorf. The CFTC accused PFG and Wasendorf of fraud, violating customer funds amounting to US$215 million and submitting false financial reports to the National Futures Association (NFA), which operated under the CFTC’s supervision. PFG faced liquidation and Wasendorf, if found guilty, faced a fine or a jail sentence.

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In late March 2012, the Securities Exchange and Surveillance Commission (SESC), the investigative unit of the Japanese Financial Services Authority (FSA), confirmed that Nomura Securities Co., Ltd (NSC) – a subsidiary of Nomura Holdings, Inc. – had been involved in insider trading. On at least three occasions, before official announcements for share issues were made, employees at NSC leaked confidential information on securities offerings that the firm underwrote, with the aim of stimulating market demand for the shares.

Piet Malan, CEO of Metermatic, had to come to some decision about whether to attempt a management buy-out (MBO) of Metermatic from its parent, SAFREN. Malan’s management team, particularly the sales manager, were very keen to take management control of Metermatic, but Malan was more cautious. He was worried about the risk of the high levels of debt that Metermatic would have to sustain and the fact that Equis, the private equity company, wanted him and the management team to put up some of the equity. Yet this was a rare opportunity that might not present itself again.

It was approaching the middle of the 2006/07 financial year. The Johannesburg Hospital finance director, Gumani Matodzi, had just completed another weekly run of the hospital’s top 20 goods and services expenses. As always, National Health Laboratory Services (NHLS) expenses were at the top of the list and yet again they were over budget. The demands of the Public Finance Management Act (no 1 of 1999) (PFMA) made it important to ensure that the hospital did its best to stay within its budget, and Matodzi wondered how he could better manage NHLS expenditure.

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On 15 September 2008, Lehman Brothers Holdings Inc. filed for bankruptcy protection at the United States Bankruptcy Court in Manhattan, New York. The news of Lehman’s bankruptcy filing sent shockwaves through the United States (US) financial markets, the impact of which was later felt across the world, contributing to the global financial crisis in the same year. As a major American financial institution, Lehman held US$639 billion in assets at the time of its demise, making its bankruptcy filing the largest in the history of the US.

As Geoffrey Qhena, chief executive officer (CEO) of the Industrial Development Corporation (IDC), sat in his office at the organisation’s headquarters in Johannesburg, reviewing details of the recently published annual report in preparation for a meeting with the board, he reflected on the state of the organisation he had led since 2005.

In August 2014, seven years after Ellerine Holdings Limited (EHL) had been purchased by African Bank Investments Limited (ABIL), the board of EHL announced that EHL and Ellerine Furnishers (Pty) Ltd (EF) had applied for voluntary business rescue. The new EHL chief executive officer, Mano Moodley, and his board wondered if their decision to partner with ABIL had been too hasty. If they had chosen an alternative partner, would the outcome have been different?

At the end of the third quarter of 2007, Leon Kirkinis, chief executive officer (CEO) of African Bank Investments Limited (ABIL), unexpectedly arrived at the head office of Ellerine Holdings Limited (EHL), a South African furniture retail group, with a proposal to purchase EHL. For some time, EHL, which derived a substantial portion of its profit from loans provided to customers wishing to buy furniture, had been looking to enter into a deal with a bank as a means of growing its business. Up until the ABIL offer, EHL had been seriously considering a joint venture with Capitec Bank.