Management Buyouts and Rollover Equity

A management buyout (MBO) is a leveraged buyout where the company's own executives are on the buying side of the deal, usually partnered with a private equity firm that provides most of the money and the debt financing. The same managers who used to answer to public shareholders end up owning a large equity stake in the private company after the deal closes.

How rollover equity works. Suppose an executive holds stock and options worth $10 million at the $30-per-share deal price. Rather than take the full $10 million in cash, the executive agrees to "roll over" $4 million of it directly into equity of the new private holding company, receiving the remaining $6 million in cash. That $4 million becomes the executive's ownership stake in the buyout vehicle, subject to the same leverage and risk as the sponsor's own investment, and typically illiquid until the company is eventually sold or taken public again.

MBOs raise an obvious governance tension: the same managers negotiating the sale price on behalf of public shareholders also stand to profit from buying the company cheaply. Because of this conflict, boards typically appoint a special committee of independent directors to negotiate against management and solicit competing bids, and courts scrutinize MBO pricing more closely than an arm's-length sale to an unrelated buyer.