Management Buy-outs and Privatization

Abstract Most discussion about privatization appears to assume, explicitly or implicitly, that it will be effected by stock market flotation to create a dispersed ownership PLC (Vickers and Yarrow 1988). This focus of attention has been despite the large number of other forms of sale, such as buy-outs and sales to third parties, which have taken place (Wright, Thompson, and Robbie 1989). The benefits to be derived from privatization may be extended if these other forms of private-sector ownership are considered. This chapter critically examines the merits of the management buy-out (MBO) and its close relations as a privatization device. It is suggested that agency-cost arguments, supported by a growing body of empirical evidence, indicate that the MBO form is effective in improving firm performance, at least in the short to medium term.