Management Sponsored LBO's: Considerations for Valuation

Simultaneous solutions to valuation models for the management team, interested in the buyout of the a corporate department, and the corporate owners, interested in maximizing the wealth of their stockholders, suggest LBO price modeling flexibility for mutual satisfaction. Using these models the price considerations of both parties are examined using data from a buyout case. Differences in tax rates and discount rates cause generation of additional shareholder wealth. Wealth allocation between both parties is subject to negotiation. Reliance on additional economies of scope and scale, however, may prove elusive and lead to poor subsequent LBO performance.