Management Packages after LBOs - Incentives and Value Creation

“This study adopts a “mixed research methods” approach in order to try to identify the most common management incentive packages (MIP) and mechanisms used in companies under leveraged buyout (LBO), namely in France, and what other non-pay related factors influence the motivational effects of these MIPs and ultimately the value creation expected from the LBO. It quantitatively analyses data – obtained from the sponsoring investment bank – on French companies currently under LBO and uses the findings to design questions for semi-structured interviews conducted with sources having vast experience in Mergers and Acquisitions (M&A) and Private Equity (PE). It is the analysis of this qualitative data using axial coding and subsequent discussion that compose this study’s main findings, as the often-undervalued management motivation aspects are extremely important to understand this vastly understudied topic.” Francesco da Costa Gatta.(+)

 

Management Packages after LBOs – Incentives and Value Creation

Dissertação apresentada à Business School da Universidade de Edinburgh para obtenção do grau de Mestre em International Business and Emerging Markets

Francesco da Costa Gatta*

* “This study adopts a “mixed research methods” approach in order to try to identify the most common management incentive packages (MIP) and mechanisms used in companies under leveraged buyout (LBO), namely in France, and what other non-pay related factors influence the motivational effects of these MIPs and ultimately the value creation expected from the LBO. It quantitatively analyses data – obtained from the sponsoring investment bank – on French companies currently under LBO and uses the findings to design questions for semi-structured interviews conducted with sources having vast experience in Mergers and Acquisitions (M&A) and Private Equity (PE). It is the analysis of this qualitative data using axial coding and subsequent discussion that compose this study’s main findings, as the often-undervalued management motivation aspects are extremely important to understand this vastly understudied topic.

Sweet Equity and Ratchet Share appear to be the most used mechanisms and the study concludes that taxation is a key factor taken into consideration when designing MIPs, as these tend to revolve around “tax-effectiveness” and appear to be the lead cause of MIP differences between countries and over the years.

Other aspects that are vital to ensuring the success of the MIP are its flexibility in the event of negative, exogenous events and the trust and alignment of interests between the management team and the PE fund. The research concludes that these can be ensured by having PE actively involved on the companies’ boards and by having three anti-dilution measures – described as “The Holy Trinity” – put in place before the LBO is executed.”

pdf Dissertation Report


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