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EUROPEAN MANAGEMENT BUY-OUT FUNDS:
OPPORTUNITY SELECTION CRITERIA

Daniel Muzyka, INSEAD
Michael Hay London Business school

INSEAD
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Principal Topics
This research deals with the issue of what criteria management buy-out (MBO) investors use in evaluating potential investment opportunities. The research provides specific rankings of the importance of the criteria applied in evaluating opportunities and investigates whether there are clusters of MBO investors who apply different-models.

Method
The research methods utilized for this work involve both exploratory and structured multi-dimensional scaling techniques. The methods are largely the same as those utilized in investigating the relative importance of the criteria applied by venture capitalists in selecting opportunity which were presented at last year's conference (see Muzyka, Birley and Lelaux, BERC 1993). This provides us with an obvious comparative database. The questionnaires for the MBO investors were constructed by reviewing the literature regarding the criteria applied by MBO investors as well as the other information supplied during the course of open-ended interviews with 7 investors. The questionnaire generated from this exploratory work was then tested with a small sample of MBO investors, adjusted and then completed by a sample of 45 investors., primarily in the United Kingdom. In addition to a main questionnaire which supplies information on the general opportunity criteria two other questionnaires were constructed and completed by the investors which test the characteristics of the MBO team leader and the team that are prized by MBO investors.

Major Findings
The major findings of the research are the relative criteria ranking information which will be provided during the presentation. What is consistent with the findings from the previous work with venture capitalists is that MBO investors are primarily focused on evaluating the potential leadership and the management team. However, unlike venture capital investors, they have "one eye on the door": the exit path and timing must be much clearer for an MBO investor than for a venture capitalist. Other findings will be presented regarding the characteristics the potential MBO investors prize in the leadership of the MBO team and leader. Some clear findings from this work suggest that MBO investors are particularly interested in the change and crisis management skills of the MBO leader. What they appear to be less interested in are sorts of general management skills typically valued in divisional general managers of larger companies. Since many MBOs and MBO teams come from the ranks of large company divisions and division general managers, this suggests a certain paradox.

Implications
The implications of this work are broad. They provide us with clearer, specific insight into the relative importance of the criteria applied by NEO investors in. evaluating deals. They can aid MBO in understanding what information and impressions they must convey to potential MBO investors.

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