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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Which feature is most characteristic of the financing structure in a typical management buyout compared with an ordinary acquisition by a strategic buyer?

In a management buyout, the existing managers buy the business they run, investing their own money alongside private equity investors and lenders, and end up with a significant equity stake. A takeover by a competitor for synergies is a strategic acquisition instead.

  1. AManagers invest their own funds alongside institutional investors and lenders, and gain a significant equity stake in the business they runCorrect
  2. BThe acquirer issues bonus shares to existing shareholders of the target as consideration
  3. CThe deal is always financed entirely out of the target's retained earnings with no external borrowing
  4. DControl passes to an unrelated competitor who combines operations to achieve synergies

Explanation

In an MBO, the existing management team buys the business, usually backed by private equity and lenders, and takes meaningful equity ownership. Competitor-led synergy deals are strategic acquisitions, not MBOs. MBOs typically involve external debt, not only retained earnings.

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