What's The Deal With Buyouts?

On April 3, 2006 Global 360 was purchased by TA Associates in a $200 million management buyout (MBO), as announced in this press-release. Why am I talking about this when it happened over a month ago? Two reasons:

1. I continue to get asked about the nature of this transaction and the differences between the types of private equity buyouts.
2. Buyouts have been extremely popular and continue to grow

First, what are the different types of buyouts? A buyout is executed when either the controlling stake or the complete company is sold. There are two basic flavors: Management Buyout (MBO) and Leveraged Buyout (LBO). An MBO, often referred to as "going private," exists when a company has its outstanding shares purchased by an individual or small group of investors in order to obtain complete ownership. In the case of Global 360, when Sonny Oates, the primary owner, decided to retire, he executed an MBO with TA Associates, Technology Crossover Ventures and JMI Equity. More on this in a moment.

An LBO is a takeover that occurs primarily through borrowed money (typically greater than 70% of the total purchase price) often using the company's own assets as collateral. An LBO is often viewed as a desperate transaction, used to prevent hostile take-overs, or ensure a company's survival in rough times. LBOs were made famous during the 1980's.

A February 2006 article in the Washington Post captured the trends in "private equity dealmaking." Here are a few key facts (from the article):

• Private equity firms struck deals worth $396 billion in 2005, a third straight record year and a 51 percent increase over 2004, according to Thomson Financial _ outstripping a 39 percent rise in overall mergers and acquisitions business.
• In 2005 buyout houses raised $261 billion in new investment...an all-time high
• Overall, take-private deals rose by more than 150 percent worldwide to $97.4 billion, beating the previous record of $85 billion in 1988
• The growth of buyouts is widely blamed on the burden of Sarbanes-Oxley legislation and increased shareholder litigation risk

So what is the impact of the MBO on Global 360 and its customers? Very positive. This is for many reasons, not the least of which is the instant improvement to the Global 360 balance sheet, giving us access to the capital for growth and acquisitions. In addition, the management team and vision remain in place, only with greater resources for execution. This is because TA, TCV, and JMI have no interest in managing the company, as evidenced by their 28-year investment history and portfolio. In a market ripe for consolidation (as described by Gartner), this buyout ensures Global 360's independence and leadership position.

For more information on buyouts, checkout the always interesting "Buyout Blog."