Guide to Analysing Companies

LSE
See london stock exchange.
Lutine bell
A bell salvaged in 1859 from a frigate called 
Lutine that had been
lost at sea 60 years earlier. The bell hangs in the main hall of the
lloyd’s insurance market. Its tolling foretold gloom when
news arrived of a ship formerly reported as “missing, fate
unknown”. Traditionally, one ring of the bell was for bad news,
two for good. These days the bell is rung before important an-
nouncements to the market.
L
196
LONG
02 Essential Finance 10/11/06 2:22 PM Page 196

---

Mm
M&A
See mergers and acquisitions.
Management buy-out
A takeover of a company by a group of its own managers or,
in rare cases, by a team of managers from outside. The man-
agers set up a new company, which buys the old one with
money borrowed from a mixture of banks and private
equity firms. The banks use the assets of the company as
collateral for their loan.
A management buy-out (mbo) invariably raises a company’s
debt and reduces its equity. As a result, it is often called a
leveraged buy-out. This makes it doubly vulnerable to any
rise in the rate of interest: first, because such a rise is likely
to damage its business; and second, because it adds to the cost
of servicing the debt.
During the 1980s, mbos frequently balanced a pile of debt on
an equity base that made up as little as 10% of the total. Even
with mbos of established businesses generating a lot of cash,
this often led to problems, particularly when interest rates went
up. These days, mbos are more often constructed on a broader
equity base making up, say, 35–40% of the total capital. In
such cases, the managers and private equity firms who put up
the equity have more at risk but also more control of the
company’s destiny.