The buy road

No longer the ugly duckling, management buyouts are proving their worth. Kenneth Shand investigates recent trends

In the UK, management buyouts (MBOs) were once regarded as transactions of last resort – the ugly duckling of corporate finance. Very often, the vendor would contemplate a sale to management only if the business proved unsaleable to anyone else. But since the early 1980s, the turnaround in this market has been dramatic.
MBOs and their close relations management buy-ins (MBIs), now account for more than half of the total UK M&A activity. This explosion was fuelled by a combination of legislative changes, allowing institutions to take security on an acquired company's assets and the emergence of venture capitalists and private equity funders as potential acquirers of businesses.
Very often, vendor-motivated MBOs are aimed at generating greater focus or synergy within a previously unwieldy group structure. Another purpose may be to divest businesses that are not producing acceptable financial returns, or to reduce the prospect of a hostile takeover bid resulting from poor overall performance. An 'assisted departure' by way of an MBO may be an attractive solution to a business's strategic problems. MBOs are also often used to solve succession problems and may be preferable to a sale to an outsider.
Manager-driven MBOs are usually inspired by a personal desire to acquire control of the business, often with a substantial equity stake and to direct and influence organisational strategy, culture and objectives. The other key elements of most MBOs are, of course, the financiers, who recognise the potential to earn higher returns than are often available when investing in large established companies and lower failure rates than are associated with start-ups.
Any comment on MBOs would be incomplete without a snapshot of UK trends. The MBO market grew steadily during the 1980s. It experienced very rapid growth until 1997, when the market peaked and then seemed to level off. Figures released by the Centre for Management Buyouts Research (CMBOR) show that although the MBO market is still strong in terms of deal value, volume is nowhere near the levels reached in the late 1990s.
If UK MBO activity is analysed on a quarterly basis for 2001, the statistics show evidence of a significant decrease in activity in the third quarter. This was most noticeable in the fall in the value of MBOs since the terrorist attacks in the US on 11 September. Many of the larger mega-deals were put on hold, as banks and venture capitalists became much more averse to risk.
According to research published by CMBOR in October 2001, the largest source of MBOs continues to be UK groups selling subsidiaries. Such deals accounted for 39 per cent of all buyouts, while MBOs from private company sales accounted for only 20 per cent of the UK market.
Other key findings were that the public to private market had slowed down, with the last serious activity in this field in Scotland being the delisting of Clyde Blowers in 2000, when Jim McColl led a management team to take the company private with 3i backing. UK-wide, the number of buyouts from receivership has increased, perhaps in line with the overall economic slowdown.
Although figures relating exclusively to the Scottish market are hard to come by, there is plenty of evidence of some high-profile MBO activity. In December, PricewaterhouseCoopers, Bank of Scotland, Maclay Murray & Spens and Dickson Minto were involved in the £26m MBO of oil and life sciences consultancy Wood Mackenzie from Deutsche Bank.
Leading the MBO field in Scotland in 2001 was the £210m acquisition of Whyte & Mackay from Jim Beam Brands, which completed in October 2001 despite the caution and market pessimism generated by events in the US. Although a very significant deal in Scottish terms, this was something of a one-off in MBO terms.
Other notable Scottish deals included the MBO of Scottish Power's appliance servicing division to create a new trading company, Elect Servicing Limited.
This year, headlines have been made by the £6m MBO of the Langholm Dyeing and Schofield Cloth Finishers businesses from Leeds Group, with backing from the Royal Bank of Scotland and the MBO by Axle Group Holdings of National Tyre Services and Viking International from the German-based multinational Continental. This deal, led by a four-strong MBO team, brought control of the UK's biggest retail tyre and exhaust company to Scotland. Last week saw the MBO of speciality paper producer Curtis Fine Papers, returning the Fife and Midlothian-based business to Scottish hands for the first time in 20 years.
Economic conditions have encouraged a focus on MBOs in Scotland in traditional industry sectors. The bursting of the technology bubble seems to have created a greater focus of attention in traditional sectors, with many of these deals involving a significant ongoing trading contract between the MBO vehicle and the vendor.
Research published by the European Private Equity and Venture Capital Association (EVCA) indicated that industrial and manufacturing sectors dominated the MBO market throughout the last decade, perhaps again indicative of UK economic trends as a whole.
What then of the prospects for MBOs in 2002? MBO activity remains a good marker of the general state of the economy. EVCA suggests that MBOs produce better than average performance, competitiveness, increased employment and employee involvement in the business and the creation of additional value. The research shows that post-MBO performance is characterised by significant increases in turnover.
Strategic MBOs are likely to continue as bigger companies seek to put their houses in order by consolidating their groups and stripping out non-core assets and subsidiaries as a way of improving trading performance and realising cash.
Generally, economic conditions are becoming more favourable to MBO activity. Low interest rates mean that there is plenty of debt finance and venture capital available to finance potential deals. In addition, the overall market downturn gradually seems to be leading to vendors' price expectations dropping to more realistic levels.
Cautious optimism would seem to be the key phrase. Inhibiting factors continue to be the uncertainty over the global economic outlook, particularly as the US teeters on the brink of recession and the introduction of the euro leaves unresolved angst and volatile stockmarkets worldwide. The combination of these factors may make it difficult for the MBO market to climb back to first quarter 2001 levels. However, analysts point to the possibility of an upturn in activity in certain sectors, such as biosciences, media and high-growth technology companies.
In short, it is probably too early to predict whether MBOs will dominate the M&A market in 2002, although most commentators agree that the Scottish market has picked itself up and that we can expect to see some interesting deals. n
Kenneth Shand is head of corporate at Maclay Murray & Spens