The development of an organisational innovation: Management buy-outs in the UK, 1980-97

Business History

Volumn 42, Issue 4, 2000, Pages 137-184

  Wright, Mike ^a   Robbie, Ken ^a   Chiplin, Brian ^a   Albrighton, Mark ^a  

^a UNIVERSITY OF NOTTINGHAM   (United Kingdom)

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EID: 0000812392     PISSN: 00076791     EISSN: 17437938     Source Type: Journal    
DOI: 10.1080/00076790000000305     Document Type: Article

References (174)

1. See, for example, L. Hannah, 'Takeover Bids in Britain before 1950: An Exercise in Business Pre-history', Business History, Vol.16 (1974), pp.65-77 (London, 1974); idem, The Rise of the Corporate Economy (London, 2nd edn. 1983): M. King, 'Takeover Activity in the UK', in J. Fairburn and J. Kay (eds.), Mergers and Merger Policy (Oxford, 1989); A. Hughes, 'Mergers and Economic Performance in the UK: A Survey of the Empirical Evidence 1950-1990', in M. Bishop and J. Kay (eds.), European Mergers and Merger Policy (Oxford, 1993); B. Chiplin and M. Wright, The Logic of Mergers: The Market for Corporate Control in Theory and Practice, Hobart Paper 107, Institute for Economic Affairs, London, 1987.
2. See, for example, L. Hannah, 'Takeover Bids in Britain before 1950: An Exercise in Business Pre-history', Business History, Vol.16 (1974), pp.65-77 (London, 1974); idem, The Rise of the Corporate Economy (London, 2nd edn. 1983): M. King, 'Takeover Activity in the UK', in J. Fairburn and J. Kay (eds.), Mergers and Merger Policy (Oxford, 1989); A. Hughes, 'Mergers and Economic Performance in the UK: A Survey of the Empirical Evidence 1950-1990', in M. Bishop and J. Kay (eds.), European Mergers and Merger Policy (Oxford, 1993); B. Chiplin and M. Wright, The Logic of Mergers: The Market for Corporate Control in Theory and Practice, Hobart Paper 107, Institute for Economic Affairs, London, 1987.
3. See, for example, L. Hannah, 'Takeover Bids in Britain before 1950: An Exercise in Business Pre-history', Business History, Vol.16 (1974), pp.65-77 (London, 1974); idem, The Rise of the Corporate Economy (London, 2nd edn. 1983): M. King, 'Takeover Activity in the UK', in J. Fairburn and J. Kay (eds.), Mergers and Merger Policy (Oxford, 1989); A. Hughes, 'Mergers and Economic Performance in the UK: A Survey of the Empirical Evidence 1950-1990', in M. Bishop and J. Kay (eds.), European Mergers and Merger Policy (Oxford, 1993); B. Chiplin and M. Wright, The Logic of Mergers: The Market for Corporate Control in Theory and Practice, Hobart Paper 107, Institute for Economic Affairs, London, 1987.
4. See, for example, L. Hannah, 'Takeover Bids in Britain before 1950: An Exercise in Business Pre-history', Business History, Vol.16 (1974), pp.65-77 (London, 1974); idem, The Rise of the Corporate Economy (London, 2nd edn. 1983): M. King, 'Takeover Activity in the UK', in J. Fairburn and J. Kay (eds.), Mergers and Merger Policy (Oxford, 1989); A. Hughes, 'Mergers and Economic Performance in the UK: A Survey of the Empirical Evidence 1950-1990', in M. Bishop and J. Kay (eds.), European Mergers and Merger Policy (Oxford, 1993); B. Chiplin and M. Wright, The Logic of Mergers: The Market for Corporate Control in Theory and Practice, Hobart Paper 107, Institute for Economic Affairs, London, 1987.
5. See, for example, L. Hannah, 'Takeover Bids in Britain before 1950: An Exercise in Business Pre-history', Business History, Vol.16 (1974), pp.65-77 (London, 1974); idem, The Rise of the Corporate Economy (London, 2nd edn. 1983): M. King, 'Takeover Activity in the UK', in J. Fairburn and J. Kay (eds.), Mergers and Merger Policy (Oxford, 1989); A. Hughes, 'Mergers and Economic Performance in the UK: A Survey of the Empirical Evidence 1950-1990', in M. Bishop and J. Kay (eds.), European Mergers and Merger Policy (Oxford, 1993); B. Chiplin and M. Wright, The Logic of Mergers: The Market for Corporate Control in Theory and Practice, Hobart Paper 107, Institute for Economic Affairs, London, 1987.
6. See Office for National Statistics mergers and acquisitions statistics, various issues.
7. Hannah, Rise of the Corporate Economy, chapter 3, pp.27-40.
8. Hughes, 'Mergers and Economic Performance'.
9. B. Chiplin and M. Wright, 'Divestment and Structural Change in UK Industry', National Westminster Bank Quarterly Review (Feb. 1980).
10. Hannah, Rise of the Corporate Economy, p.245 n.55, calculates that sales of subsidiaries accounted for two per cent of takeovers in the period 1919-39 compared with around a quarter in the 1970s.
11. See, for example, B. Elbaum and W. Lazonick, 'The Decline of the British Economy: An Institutional Perspective', Journal of Economic History, Vol.44 No.2 (1984), pp.567-83; A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA, 1990).
12. See, for example, B. Elbaum and W. Lazonick, 'The Decline of the British Economy: An Institutional Perspective', Journal of Economic History, Vol.44 No.2 (1984), pp.567-83; A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA, 1990).
13. See M. Jensen, 'Eclipse of the Public Corporation', Harvard Business Review, Vol.89 No.5 (1989), pp.67-75.
14. The dataset is compiled from various sources. Primarily, all equity and debt providers to management buy-outs as well as accounting firms and lawyers involved in buy-outs as intermediaries are surveyed twice yearly by the Centre for Management Buy-out Research (hereafter CMBOR); all participants respond to this survey. In addition, in order to identify many smaller buy-outs, searches are made of companies' accounts, stock exchange circulars and Textline reports.
15. For detailed discussion of the form and role of financing instruments in buy-out type transactions, see M. Wright et al., Management Buy-ins and Buy-outs: New Strategies in Corporate Management (London, 1991), chapter 6.
16. For further details on the use of these instruments, case examples and a glossary of terms, see, for example, Wright et al., Management Buy-ins and Buy-outs. For discussion of the evolution of LBO financing structures in the United States, see J. Allen, 'LBOs - The Evolution of Financial Structures and Strategies', Journal of Applied Corporate Finance, Vol.8 No.4 (1996), pp.18-29.
17. For further details on the use of these instruments, case examples and a glossary of terms, see, for example, Wright et al., Management Buy-ins and Buy-outs. For discussion of the evolution of LBO financing structures in the United States, see J. Allen, 'LBOs - The Evolution of Financial Structures and Strategies', Journal of Applied Corporate Finance, Vol.8 No.4 (1996), pp.18-29.
18. D. Citron, K. Robbie and M. Wright, 'Loan Covenants and Relationship Banking in MBOs', Accounting and Business Research, Vol.27 No.4 (1997), pp.277-96.
19. See J. Kay and D. Thompson, 'Privatisation: A Policy in Search of a Rationale', Economic Journal, Vol.96 (1986), pp.18-32; G. Bannock, The Economics of Small Firms: Return from the Wilderness (Oxford, 1981).
20. See J. Kay and D. Thompson, 'Privatisation: A Policy in Search of a Rationale', Economic Journal, Vol.96 (1986), pp.18-32; G. Bannock, The Economics of Small Firms: Return from the Wilderness (Oxford, 1981).
21. This has been characterised as the free cash-flow problem. For analysis see M. Jensen, 'Agency Costs of Free Cash Flow, Corporate Finance and Takeovers', American Economic Review, Vol.76 No.2 (1986), pp.323-9.
22. O.E. Williamson, Markets and Hierarchies (New York, 1975).
23. A. Bhide, 'Reversing Corporate Diversification', Journal of Applied Corporate Finance, Vol.3 (1990), pp.70-81.
24. M. Wright and S. Thompson, 'Divestment and the Control of Divisionalised Firms', Accounting and Business Research, Vol.17 No.67 (Summer 1987), pp.259-68 , and R. Hoskisson and T. Turk, 'Corporate Restructuring: Governance and Control Limits of the Internal Capital Market', Academy of Management Review, Vol.15 No.3 (1990), pp.459-77. Direct evidence on this problem of the interface between corporate and divisional management is provided in S. Jones, C. Rickwood and S. Greenfield, Accounting Control and Management Philosophies (London, 1993).
25. M. Wright and S. Thompson, 'Divestment and the Control of Divisionalised Firms', Accounting and Business Research, Vol.17 No.67 (Summer 1987), pp.259-68 , and R. Hoskisson and T. Turk, 'Corporate Restructuring: Governance and Control Limits of the Internal Capital Market', Academy of Management Review, Vol.15 No.3 (1990), pp.459-77. Direct evidence on this problem of the interface between corporate and divisional management is provided in S. Jones, C. Rickwood and S. Greenfield, Accounting Control and Management Philosophies (London, 1993).
26. M. Wright and S. Thompson, 'Divestment and the Control of Divisionalised Firms', Accounting and Business Research, Vol.17 No.67 (Summer 1987), pp.259-68 , and R. Hoskisson and T. Turk, 'Corporate Restructuring: Governance and Control Limits of the Internal Capital Market', Academy of Management Review, Vol.15 No.3 (1990), pp.459-77. Direct evidence on this problem of the interface between corporate and divisional management is provided in S. Jones, C. Rickwood and S. Greenfield, Accounting Control and Management Philosophies (London, 1993).
27. See Elbaum and Lazonick, 'Decline of the British Economy: An Institutional Perspective', and Chandler, Scale and Scope. For a critique, see R. Church, 'The Family Firm in Industrial Capitalism: International Perspectives on Hypotheses and History', Business History, Vol.35 No.4 (1993), pp.17-43.
28. See Elbaum and Lazonick, 'Decline of the British Economy: An Institutional Perspective', and Chandler, Scale and Scope. For a critique, see R. Church, 'The Family Firm in Industrial Capitalism: International Perspectives on Hypotheses and History', Business History, Vol.35 No.4 (1993), pp.17-43.
29. See Elbaum and Lazonick, 'Decline of the British Economy: An Institutional Perspective', and Chandler, Scale and Scope. For a critique, see R. Church, 'The Family Firm in Industrial Capitalism: International Perspectives on Hypotheses and History', Business History, Vol.35 No.4 (1993), pp.17-43.
30. H. Rose, 'London as an International Financial Centre: A Narrative History', in London Business School, The City Research Project, Subject Report XIII (London, 1994).
31. M. Reid, All-Change in the City: The Revolution in Britain's Financial Sector (London, 1988).
32. M. Buckle and J. Thompson, The UK Financial System: Theory and Practice (Manchester, 2nd edn., 1995).
33. For reviews of the evidence, see M. Jensen, 'The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems', Journal of Finance, Vol.48 No.3 (1993), pp.831-80, and S. Thompson and M. Wright, 'Corporate Governance: The Role of Restructuring Transactions', Economic Journal, Vol.105 No.430 (1995), pp.690-703.
34. For reviews of the evidence, see M. Jensen, 'The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems', Journal of Finance, Vol.48 No.3 (1993), pp.831-80, and S. Thompson and M. Wright, 'Corporate Governance: The Role of Restructuring Transactions', Economic Journal, Vol.105 No.430 (1995), pp.690-703.
35. Wright et al., Management Buy-ins and Buy-outs.
36. See, for example, Church, 'The Family Firm in Industrial Capitalism'.
37. M. Casson, 'Institutional Economics and Business History: A Way Forward?', Business History, Vol.39 No.4 (1997), pp.151-71.
38. J. Dial and K. Murphy, 'Incentives, Downsizing and Value Creation at General Dynamics', Journal of Financial Economics, Vol.37 No.3 (1995), pp.261-314.
39. R. Long, 'The Effects of Employee Ownership on Organisational Identification, Employee Job Attitudes and Organisational Performance: A Tentative Framework and Empirical Findings', Human Relations, Vol.31 (1978), pp.29-48.
40. T. Hatton, 'Profit Sharing in British Industry, 1885-1913', International Journal of Industrial Organisation, Vol.6 No.1 (1988), pp.69-90.
41. M. Gunderson et al., 'Employee Buy-outs in Canada', British Journal of Industrial Relations, Vol.33 No.3 (1995), pp.418-42.
42. Junk bonds, for example, can enable debt finance to be raised on the basis of cash flow and/or the subsequent unbundling of assets rather than on the more traditional basis of the security provided by assets; especially important when competitive bidding forces the price to be paid above asset value. Payment in Kind (PIK) securities go one step further by overcoming the constraints posed by the need to meet financing commitments from cash flow; the investor receives a return either in other securities or at the time of the sale or flotation of the buy-out.
43. A. Shleifer and R. Vishny, 'Liquidation Values and Debt Capacity', Journal of Finance, Vol.47 (1992), pp.1343-66.
44. L. Lowenstein, 'Management Buy-outs', Columbia Law Review, Vol.85 (1985), pp.730-84.
45. For the argument in favour of the long-term view of buy-outs, see M. Jensen, 'Eclipse of the Public Corporation', Harvard Business Review, Vol.67 (Sept./Oct. 1989), pp.61-74.
46. For a contrary view, see A. Rappaport, 'The Staying Power of the Public Corporation', Harvard Business Review, Vol.68 (Jan./Feb. 1990), pp.96-104.
47. Casson, 'Institutional Economics and Business History'.
48. M. Wright et al., 'Longevity and the Life-Cycle of Management Buy-outs', Strategic Management Journal, Vol.15 No.3 (1994). pp.215-27.
49. For clarity of presentation the charts distinguish broad insider generated transactions from broad outsider-generated transactions. Hence, secondary buy-outs/buy-ins and leveraged build-ups are allocated to either the buy-out or the buy-in category as appropriate. Detailed breakdowns are provided in CMBOR, Management Buy-outs Quarterly Review, Nottingham, various issues/dates. As is evident from the charts and as explained in the text, insider-and outsider-driven deals follow different growth patterns.
50. See S. Chapman, The Cotton Industry in the Industrial Revolution (London, 2nd edn., 1987).
51. For a discussion, see J.S. Toms, 'The Supply of and Demand for Accounting Information in an Unregulated Market: Examples from the Lancashire Cotton Mills, 1855-1914', Accounting, Organisations and Society, Vol.23 No.2 (1998), pp.217-38. Toms cites the cases of the Werneth, the Windsor and the Oldham Twist companies, which undertook such actions. Toms also identifies a form of management buy-in whereby promoters such as John Bunting acquired shares in listed companies and used their voting power to appoint and control the managements of the firms in their group through active monitoring and commitments to service external funding.
52. See W.A. Thomas, The Finance of British Industry, 1918-1976 (London, 1976), chapter 5.
53. T. Lorenz, Venture Capital Today (Cambridge, 2nd edn. 1989).
54. For a detailed discussion of the development of 3i, see R. Coopey, R. Clarke and D. Clarke, 3i: Fifty Years Investing in Industry (Oxford, 1995). A discussion of 3i's early experience of buy-outs is provided by R. Smith, 'Management Buy-outs: Opportunities and Strategies', in R. Arnfield et al. (eds.), Management Buy-outs: Corporate Trend for the 80s? Proceedings of the First National Conference on Management Buy-outs, 19th March 1981, Dept. of Industrial Economics, University of Nottingham (Nottingham, 1981).
55. For a detailed discussion of the development of 3i, see R. Coopey, R. Clarke and D. Clarke, 3i: Fifty Years Investing in Industry (Oxford, 1995). A discussion of 3i's early experience of buy-outs is provided by R. Smith, 'Management Buy-outs: Opportunities and Strategies', in R. Arnfield et al. (eds.), Management Buy-outs: Corporate Trend for the 80s? Proceedings of the First National Conference on Management Buy-outs, 19th March 1981, Dept. of Industrial Economics, University of Nottingham (Nottingham, 1981).
56. See Thomas, Finance of British Industry.
57. M. Wright and J. Coyne, Management Buy-outs (Beckenham, 1985).
58. G. Bannock, The Economics of Small Firms: Return from the Wilderness (Oxford, 1981).
59. J. Mitchell, 'Smaller is Beautiful', in Arnfield et al. (eds.), Management Buy-outs.
60. One trade union leader described the purchase of shares in the company by employees as a 'meal-ticket to the dole-queue', a rather misplaced statement in view of the subsequent performance of the shares.
61. For a discussion from the insiders' perspective, see S. McLachlan, The National Freight Buy-out: The Inside Story (London, 1983).
62. For discussion of the legal position, see M. Sterling and M. Wright, Management Buyouts and the Law (Oxford, 1990), chapter 4, and I. Krieger, Management Buy-outs (London, 1990), chapter 5.
63. For discussion of the legal position, see M. Sterling and M. Wright, Management Buyouts and the Law (Oxford, 1990), chapter 4, and I. Krieger, Management Buy-outs (London, 1990), chapter 5.
64. Committee to Review the Functioning of Financial Institutions (Wilson Committee), Evidence on the Financing of Industry and Trade, vol. 3 (London, 1978).
65. For discussion of development of policies adopted by the West Midlands Enterprise Board, one of the major participants, see P. Lovejoy, 'Management Buy-outs and Policy Response: The West Midlands', Regional Studies, Vol.22 (1988), pp.344-7.
66. There was some use of equity ratchets whereby managements' equity stakes could increase over time. These were typically linked to profit performance targets and/or targets for the redemption of preference shares which would provide the financing institution with a return on their investment inn the absence of a sale or flotation. Wright and Coyne, Management Buy-outs.
67. For discussion of DPCE, see ibid., chapter 8.
68. K. Harrigan, Strategies for Declining Businesses (Lexington, MA, 1980); I. Duhaime and J. Grant, 'Factors influencing Divestment Decision-Making: Evidence from a Field Study', Strategic Management Journal, Vol.5 (1984), pp.301-18.
69. K. Harrigan, Strategies for Declining Businesses (Lexington, MA, 1980); I. Duhaime and J. Grant, 'Factors influencing Divestment Decision-Making: Evidence from a Field Study', Strategic Management Journal, Vol.5 (1984), pp.301-18.
70. Hannah notes that, in the 1970s, the restructuring was not inhibited by the proliferation of large diversified enterprises. Rather, the market in subsidiaries was more fluid than under the previous regime of scattered family ownership. The Rise of the Corporate Economy, pp.155 et seq.
71. See M. Wright, 'The Make-Buy Decision and Managing Markets: The Case of Management Buy-outs', Journal of Management Studies, Vol.23 No.4 (1986), pp.443-64, who finds that 32 companies out of a sample of 68 divestments had some form of trading relationship with their former parent.
72. B. Chiplin and M. Wright, The Logic of Mergers: The Market for Corporate Control in Theory and Practice, in Institute of Economic Affairs, Hobart Paper 107 (London, 1987).
73. See CMBOR, UK Management Buy-outs, 1988 (Nottingham, 1988).
74. Office for National Statistics.
75. A study by Porter in the US of the acquisition and divestment activity of 33 firms since 1950 found that half of diversifying acquisitions had been divested by the early 1980s (M. Porter, 'The Trouble with Acquisitions', Financial Times, 8 Dec. 1986, p.14). UK evidence suggests that a significant proportion of divestment buy-outs were sold within a relatively short period following acquisition. M. Wright, 'Redrawing the Boundaries of the Firm', in S. Thompson and M. Wright (eds.), Internal Organisation, Efficiency and Profit (Deddington, 1988).
76. A study by Porter in the US of the acquisition and divestment activity of 33 firms since 1950 found that half of diversifying acquisitions had been divested by the early 1980s (M. Porter, 'The Trouble with Acquisitions', Financial Times, 8 Dec. 1986, p.14). UK evidence suggests that a significant proportion of divestment buy-outs were sold within a relatively short period following acquisition. M. Wright, 'Redrawing the Boundaries of the Firm', in S. Thompson and M. Wright (eds.), Internal Organisation, Efficiency and Profit (Deddington, 1988).
77. See J. Vickers and G. Yarrow, Privatization: An Economic Analysis (Cambridge, MA, 1988), and M. Wright and S. Thompson, 'Divestiture of Public Sector Assets', in P. Jackson and C. Price (eds.), Privatisation and Regulation: A Review of the Issues (London, 1994).
78. See J. Vickers and G. Yarrow, Privatization: An Economic Analysis (Cambridge, MA, 1988), and M. Wright and S. Thompson, 'Divestiture of Public Sector Assets', in P. Jackson and C. Price (eds.), Privatisation and Regulation: A Review of the Issues (London, 1994).
79. M. Wright, S. Thompson and K. Robbie, 'Privatisation via Management and Employee Buy-outs: Analysis and UK Evidence', Annals of Public and Cooperative Economics, Vol.60 No.4 (1989), pp.399-430.
80. K. Robbie and M. Wright, 'Local Authorities, Compulsory Competitive Tendering and Buy-outs', Local Government Studies, Vol.22 No.1 (1996), pp.127-46, and M. Paddon, 'Management Buy-outs and Compulsory Competition in Local Government', Local Government Studies, Vol.17 No.3 (1991), pp.27-52.
81. K. Robbie and M. Wright, 'Local Authorities, Compulsory Competitive Tendering and Buy-outs', Local Government Studies, Vol.22 No.1 (1996), pp.127-46, and M. Paddon, 'Management Buy-outs and Compulsory Competition in Local Government', Local Government Studies, Vol.17 No.3 (1991), pp.27-52.
82. The Financial Services Act 1986 required prospectuses to be provided for all investors, which was too costly and time-consuming in a buy-out. Problems also arise as a result of the lack of wealth of many employees with a consequence that the take-up of shares often fell unevenly (these were particular problems in the NFC buy-out which utilised direct share purchase by employees).
83. For analysis of the operation of ESOPs in the UK, see N. Wilson (ed.), ESOPs (London, 1992). The particular case of buy-outs with employee ownership is analysed in M. Wright and K. Robbie, 'Employee Buy-outs in the UK', in ibid.
84. For analysis of the operation of ESOPs in the UK, see N. Wilson (ed.), ESOPs (London, 1992). The particular case of buy-outs with employee ownership is analysed in M. Wright and K. Robbie, 'Employee Buy-outs in the UK', in ibid.
85. M. Wright et al., 'Management Buy-outs, Trade Unions and Employee Ownership', Industrial Relations Journal, Vol.21 No.2 (1990), pp.137-46.
86. For a practitioner view, see D. Hutchings, 'The Buy-in Comes Along', Acquisitions Monthly (July 1987).
87. The first being the £73.5 million buy-in of the bearings division of RHP.
88. For details on trends in US going private transactions see, for example, the Mergerstat Review published by Merrill Lynch and regular issues of Mergers and Acquisitions magazine.
89. For details on trends in US going private transactions see, for example, the Mergerstat Review published by Merrill Lynch and regular issues of Mergers and Acquisitions magazine.
90. Other cases include Tyzack, Ryan International and British Syphon. An earlier attempted MBO at Molins in 1986 failed because of institutional shareholder concerns over the bid price. We return to this issue below.
91. The first prominent failed hostile buy-in attempt was the Valuedale bid for Simon Engineering in 1987.
92. Wright and Coyne, Management Buy-outs, pp.31-7.
93. CMBOR/Venture Economics, Trends in UK Buy-outs (London, 1987).
94. British Venture Capital Association (hereafter BVCA), Report on Investment Activity (London, various issues/dates).
95. These funds were principally the Electra Candover Direct Investment Plan, the Schroder UK Buy-out Fund and the Citicorp Management Leveraged Buy-out Fund. For details see CMBOR/Venture Economics, Review of UK Management Buy-outs (London, 1986).
96. See Wright et al., Management Buy-ins and Buy-outs.
97. In both 1985 and 1986 22 buy-outs were floated on the USM; twice the total buy-out flotations on the main market in these two years CMBOR, Management Buy-outs Quarterly Review (Nottingham, Spring 1994), p.50.
98. In 1987 and 1988 the relative positions of the two markets in terms of numbers of flotations was almost exactly reversed.
99. Equity ratchets were often structured through the use of Cumulative Redeemable Participating Preferred Ordinary (or Preference) Shares which UK legislation permitted. For discussion of equity ratchets see M. Wright et al., 'Realisations of Venture Capital Investments: The Case of Management Buy-outs', Service Industries Journal, Vol.10 No.3 (1990), pp.499-520. Equity ratchets were also a product of increased competition amongst financiers as they provided a means by which one institution could offer a higher equity stake to management than might be on offer from competitors. Equity ratchets also arose in cases of disagreements between management and financiers about forecast performance and frequently lead to disputes between the two parties about whether targets have been met.
100. K. Robbie, M. Wright and C. Ennew, 'Management Buy-outs from Receivership', Omega, Vol.21 No.5 (1993), pp.519-30.
101. M. Wright, K. Robbie and M. Ward, 'Management Buy-outs in the Regions: A Tale of Two Recessions', Regional Studies, Vol.28 No.3 (1994), pp.319-30.
102. For an analysis of the impact of the liquidity of corporate asset markets on the ability to leverage transactions see Shleifer and Vishny, 'Liquidation Values and Debt Capacity'. The Lowndes Queensway buy-in entered receivership after refinancings and at the end of 1990 Isosceles began a series of major refinancings.
103. K. Robbie and M. Wright, Management Buy-ins: Entrepreneurs, Active Investors and Corporate Restructuring (Manchester, 1996), chapters 5-7.
104. D. Citron, K. Robbie and M. Wright, 'Loan Covenants and Relationship Banking in MBOs', Accounting and Business Research, Vol.27 No.4 (1997), pp.277-96.
105. In the first half of 1997 28 IBOs were completed compared to ten in the same period of 1996, with their average size being £51 million compared to £11 million for all buy-outs and buy-ins. Management Buy-outs Quarterly Review (Nottingham, Autumn 1997), pp.8-9.
106. Between 1993 and 1997, 121 leveraged build-ups with a total value of £2 billion were identified in the UK. Management Buy-outs Quarterly Review (Nottingham, Winter 1997/98).
107. Private vendors wishing to maintain the independent existence of their businesses and to reward non-family managers who have helped them create such businesses may be less concerned about entering into an auction process when they seek to sell their businesses.
108. BVCA, Performance Measurement Survey (London, 1997).
109. The figures were 1995 - £1.1 bn; 1996 - £2.4bn; 1997 - £9 bn. CMBOR, Management Buy-out Quarterly Review (Nottingham, Winter issues 1995/96, 1996/97, 1997/98). Note that an unspecified proportion of these funds is for investment in European buy-outs.
110. M. Ball and A. Zombanakis, 'The Revolution in European Funding', Euromoney Corporate Finance (Nov. 1997) pp.28-33; E. Hagger, 'Buy-out Dilemma: Bank Debt or High Yield Bond?', Euromoney: European Debt Finance (1998), pp.8-13.
111. M. Ball and A. Zombanakis, 'The Revolution in European Funding', Euromoney Corporate Finance (Nov. 1997) pp.28-33; E. Hagger, 'Buy-out Dilemma: Bank Debt or High Yield Bond?', Euromoney: European Debt Finance (1998), pp.8-13.
112. P. Molyneux, 'US High Yield Debt and the Case for a European Market', National Westminster Bank Quarterly Review (Feb. 1990), pp.2-15.
113. In the case of Intertek, Table 3, the inclusion of a US high yield bond was possible as 60 per cent of revenues were in dollars.
114. Ball and Zombanakis, 'The Revolution in European Funding'.
115. In 1995 four buy-out-type organisations floated on AIM. In 1996 there were seven and in 1997 there were 1. CMBOR, Management Buy-outs Quarterly Review (Nottingham, Winter 1997/98).
116. In the 18 months from 1996 to mid-1997, 50 secondary buy-outs and buy-ins were completed, representing 14.5 per cent of all realisations from buy-outs and buy-ins in this period. Ibid. (Autumn 1997), p.61.
117. Although these companies were often those which were left after the funds' star performers had exited, they potentially offered prospects for gains where their realisation had been delayed by factors outside management's control (e.g. recession in a particular firm's sector), though there was a need to distinguish these 'good rump' cases from the less attractive 'living dead' (see M. Wright et al., 'Harvesting and the Longevity of Management Buy-outs and Buy-ins: A Four Country Study', Entrepreneurship: Theory and Practice, Vol.18 No.2 (1993), pp.89-110).
118. CMBOR database. For details see CMBOR, Management Buy-outs Quarterly Review, Nottingham, various issues/dates.
119. The simple correlation between the value of acquisitions (i.e. independent acquisitions plus sales of subsidiaries between company groups) and the value of buy-outs plus buy-ins for the period 1982-97 is 0.82, which is significant at the 1 per cent level (2-tailed). For the corresponding numbers of transactions, the correlation is 0.09, which is not significantly different from zero.
120. For the period 1980-83, see Wright and Coyne, Management Buy-outs, chapter 7, and J. Hanney, 'Management Buy-outs: An Offer You Can't Refuse', Omega, Vol.14 No.2 (1986), pp.119-34. For the period 1983-86, see M. Wright, S. Thompson and K. Robbie, 'Venture Capital and Management-Led Leveraged Buy-outs', Journal of Business Venturing, Vol.7 No.1 (1992), pp.45-71.
121. For the period 1980-83, see Wright and Coyne, Management Buy-outs, chapter 7, and J. Hanney, 'Management Buy-outs: An Offer You Can't Refuse', Omega, Vol.14 No.2 (1986), pp.119-34. For the period 1983-86, see M. Wright, S. Thompson and K. Robbie, 'Venture Capital and Management-Led Leveraged Buy-outs', Journal of Business Venturing, Vol.7 No.1 (1992), pp.45-71.
122. For the period 1980-83, see Wright and Coyne, Management Buy-outs, chapter 7, and J. Hanney, 'Management Buy-outs: An Offer You Can't Refuse', Omega, Vol.14 No.2 (1986), pp.119-34. For the period 1983-86, see M. Wright, S. Thompson and K. Robbie, 'Venture Capital and Management-Led Leveraged Buy-outs', Journal of Business Venturing, Vol.7 No.1 (1992), pp.45-71.
123. Robbie and Wright, Management Buy-ins, chapters 5 and 6.
124. Consistent with these findings, a Cobb-Douglas Production Function analysis performed on each of these six years with a dummy variable to denote whether the company was a buy-out or not finds significant coefficients on the buy-out dummy for years two to five. For further details see M. Wright, N. Wilson and K. Robbie, 'The Longer-Term Effects of Management-Led Buy-outs', Journal of Entrepreneurial and Small Business Finance, Vol.5 No.3 (1996), pp.213-34.
125. BVCA, Performance Measurement Survey 1996 (London, 1997).
126. Buy-outs have also contributed to an increase in the distribution of ownership in the UK, with employees in buy-outs more likely to receive equity (44 per cent of cases) than is the case in other privately-owned companies where employees are likely to receive equity in about 36 per cent of cases. CMBOR, Management Buy-outs Quarterly Review (Nottingham, Winter 1995/96), pp.17-27. However, given the preponderance of management buy-outs where a small group of executives are shareholders and of uneven distributions of equity where employees are shareholders, the distribution of gains is highly skewed.
127. CMBOR, Management Buy-outs Quarterly Review (Nottingham, Spring, 1997), p.43.
128. Excess return on total capital was calculated adjusting the change in total capital between buy-out and flotation (which included the market value of equity, debt and dividend and interest payments) for the risk-adjusted market return. The excess return on equity was calculated in a similar manner. The risk free rate is proxied by the three-month Treasury Bill return, the market return is based on changes in the FT 500 Index and beta is estimated using the LBS Risk Measurement Service estimate of the post-float equity beta in the absence of betas during the private buy-out phase. Different definitions of the variables were used and produced comparable results.
129. S. Thompson, M. Wright and K. Robbie, 'Management Equity Ownership, Debt and Performance: Some Evidence from UK Management Buy-outs', Scottish Journal of Political Economy, Vol.39 (1992), pp.413-30. Although it is possible that managers' inside information about the perceived potential gain would be associated with them taking a higher stake, further examination did not support this reverse causality argument.
130. National Audit Office, 'Privatisation of the Rolling Stock Leasing Companies', HC 576, Session 1997-98, 5 March 1998.
131. Wright and Coyne, Management Buy-outs, chapter 7.
132. Wright et al., 'Management Equity Ownership, Debt and Performance'.
133. Within two years of buy-out, employment in the survey covering the early 1980s was still below that before buy-out, whilst in the second survey it was some two per cent above the immediate post-buy-out level. The employment effects of buy-outs varies considerably according to the source and subsequent success of the enterprise, with buy-outs from receivership and divestments being particularly adversely affected in general and buy-outs of family-owned firms and those which subsequently float on a stock market experiencing the most notable improvements in employment. Over three-fifths of buy-outs from receivership examined by CMBOR had not effected redundancies on buy-out and almost a fifth recorded increases in employment up to a year after the change in ownership (Robbie et al., 'Management Buy-outs from Receivership'). See M. Wright et al., 'An Analysis of Management Buy-out Failure', Managerial and Decision Economics, Vol.17 No.1 (1996), pp.57-70 for analysis of the determinants of buy-out failure.
134. M. Wright et al., 'Management Buy-outs in the Short and Long Term', Journal of Business Finance and Accounting, Vol.22 No.4 (1995), pp.461-82. The year in which the transaction is completed is also influential, a point to which we return below. Note that problems in tracing the fate of buy-out-type companies, resulting such factors as name changes following buy-out, may mean that these estimations of the exit rates of buy-out-type transactions may be understated.
135. CMBOR, Management Buy-outs: Quarterly Review (Nottingham, Spring 1998), Table A32, p.99.
136. For discussion of the development of KKR, see A. Kaufman and E.J. Englander, 'Kohlberg, Kravis, Roberts & Co. and the Restructuring of American Capitalism', Business History Review, Vol.67 (Spring 1993), pp.52-97. For discussion of the growth of leveraged build-ups in the US see, for example, R. Trottier, 'Leveraged Build-ups: More Muscle for the Entrepreneur', Mergers and Acquisitions, Vol.30 No.3 (1995), pp.35-9.
137. For discussion of the development of KKR, see A. Kaufman and E.J. Englander, 'Kohlberg, Kravis, Roberts & Co. and the Restructuring of American Capitalism', Business History Review, Vol.67 (Spring 1993), pp.52-97. For discussion of the growth of leveraged build-ups in the US see, for example, R. Trottier, 'Leveraged Build-ups: More Muscle for the Entrepreneur', Mergers and Acquisitions, Vol.30 No.3 (1995), pp.35-9.
138. For detailed analysis see Robbie and Wright, Management Buy-ins, pp.26-37.
139. H. De Quervain, 'Tracking the Attraction', Acquisitions Monthly (May 1989), pp.38-40; D. Hutchings, 'The Buy-in Comes Along', Mergers and Acquisitions (July 1987).
140. H. De Quervain, 'Tracking the Attraction', Acquisitions Monthly (May 1989), pp.38-40; D. Hutchings, 'The Buy-in Comes Along', Mergers and Acquisitions (July 1987).
141. Defined as Deal value/operating profit.
142. M. Wright and K. Robbie, 'The Investor-led Buy-out: A New Strategic Option', Long Range Planning, Vol.29 No.5 (1996), pp.691-702.
143. These issues have been discussed at length in the United States, where concerns about managements' opportunism in taking companies private in the absence of a hostile takeover bid were especially acute. For a particularly critical review, see L. Lowenstein, 'Management Buy-outs', Columbia Law Review (May 1985) pp.730-874. For a balanced assessment of the pricing issues, see Y. Amihud, Leveraged Management Buy-outs: Causes and Consequences (New York, 1989).
144. These issues have been discussed at length in the United States, where concerns about managements' opportunism in taking companies private in the absence of a hostile takeover bid were especially acute. For a particularly critical review, see L. Lowenstein, 'Management Buy-outs', Columbia Law Review (May 1985) pp.730-874. For a balanced assessment of the pricing issues, see Y. Amihud, Leveraged Management Buy-outs: Causes and Consequences (New York, 1989).
145. For evidence see Wright and Coyne, Management Buy-outs, pp.13-16.
146. The Cadbury Report of 1992 represented a major formalisation of these pressures with its emphasis on the role of non-executive directors, audit committees and institutional investors in monitoring the behaviour of corporate management.
147. These rules included a requirement to appoint an independent adviser to the offeree board, rules on the secrecy with which such a buy-out may be organised, prohibitions on share dealings by those with privileged information, provision of information provided to prospective financiers to all shareholders and other bidders and a description of the proposed financing structure.
148. M. Wright et al., 'Restructuring and Failure in Buy-outs', Business Strategy Review, Vol.5 No.2 (1994), pp.21-40.
149. This problem was probably greatest in the case of the bus services sector; see, for example, National Audit Office, National Bus, HC43 (London, 1991) and idem, Sale of the Scottish Bus Group, HC884 (London, 1993). However, it should be borne in mind that under-pricing has been a general issue in all forms of privatisation; see R. Hodges and M. Wright, 'Audit and Accountability in the Privatisation Process: The Role of the National Audit Office', Financial Accountability and Management, Vol.1 No.2 (1995), pp.153-70.
150. This problem was probably greatest in the case of the bus services sector; see, for example, National Audit Office, National Bus, HC43 (London, 1991) and idem, Sale of the Scottish Bus Group, HC884 (London, 1993). However, it should be borne in mind that under-pricing has been a general issue in all forms of privatisation; see R. Hodges and M. Wright, 'Audit and Accountability in the Privatisation Process: The Role of the National Audit Office', Financial Accountability and Management, Vol.1 No.2 (1995), pp.153-70.
151. This problem was probably greatest in the case of the bus services sector; see, for example, National Audit Office, National Bus, HC43 (London, 1991) and idem, Sale of the Scottish Bus Group, HC884 (London, 1993). However, it should be borne in mind that under-pricing has been a general issue in all forms of privatisation; see R. Hodges and M. Wright, 'Audit and Accountability in the Privatisation Process: The Role of the National Audit Office', Financial Accountability and Management, Vol.1 No.2 (1995), pp.153-70.
152. Analysis from CMBOR database; see Wright et al., 'Management Buy-outs in the Short and Long Term', and CMBOR, Management Buy-outs Quarterly Review, Nottingham, various issues/dates for details.
153. Analysis from CMBOR database; see Wright et al., 'Management Buy-outs in the Short and Long Term', and CMBOR, Management Buy-outs Quarterly Review, Nottingham, various issues/dates for details.
154. The gains following the 1982 management and employee buy-out of National Freight (NFC) is often cited as an important result of privatisation; see, for example, S. McLachlan, The NFC Buy-out (London, 1983), yet at least part of these gains result from the disposal of substantial property assets in a privatisation which did not incorporate clawback mechanisms in the structure of the sale. For a critical analysis see T. Buck, S. Thompson and M. Wright, 'Post Communist Privatisation and the British Experience', Public Enterprise, Vol.11 Nos.2/3 (1991), pp.185-200.
155. The gains following the 1982 management and employee buy-out of National Freight (NFC) is often cited as an important result of privatisation; see, for example, S. McLachlan, The NFC Buy-out (London, 1983), yet at least part of these gains result from the disposal of substantial property assets in a privatisation which did not incorporate clawback mechanisms in the structure of the sale. For a critical analysis see T. Buck, S. Thompson and M. Wright, 'Post Communist Privatisation and the British Experience', Public Enterprise, Vol.11 Nos.2/3 (1991), pp.185-200.
156. See Audit Commission, Management Buy-outs -Public Interest or Private Gain?, Paper No.6 (London, 1990) and National Audit Office with CMBOR, Audit of Management Buy-outs in the Public Sector (London, 1991).
157. See Audit Commission, Management Buy-outs -Public Interest or Private Gain?, Paper No.6 (London, 1990) and National Audit Office with CMBOR, Audit of Management Buy-outs in the Public Sector (London, 1991).
158. See CMBOR, Management Buy-outs Quarterly Review (Nottingham, Winter 1996/97). Buy-outs from British Rail such as Angel Trains, Eversholt Leasing, Porterbrook Leasing, Fastline Group and Scotland Track Renewal were all sold within 18 months of their initial privatisation. In addition, concerns have been expressed that the managers of Wessex Train Care/Eastleigh rail depot had bought out the company knowing that it had greater cash balances available than outside bidders had been led to believe. D. MacIntyre and C. Blackhurst, 'Taxpayers helped Fund Rail Buy-out', Independent, 13 Feb. 1996. The National Audit Office report, British Rail Maintenance Ltd: Sale of Maintenance Depots, HC583 (London, 1995/96) criticised the sale process for having little effective competition, for an absence of benchmark valuations and for the confusion about valuation arising from the failure of British Rail to remove the cash balances from the company prior to sale. The Public Accounts Committee Report on the same case (HC 168, 1996/97) criticised the role of the Department of Transport in particular and explicitly in relation to its failure to provide all bidders with the same information in the context of their competition with a management buy-out bid. In the light of the criticisms levelled by the PAC at the Department of Transport at the time of the buy-outs from National Bus (HC119, Lonodn, 1990/91) it is little short of astonishing that such criticisms should arise subsequently.
159. See CMBOR, Management Buy-outs Quarterly Review (Nottingham, Winter 1996/97). Buy-outs from British Rail such as Angel Trains, Eversholt Leasing, Porterbrook Leasing, Fastline Group and Scotland Track Renewal were all sold within 18 months of their initial privatisation. In addition, concerns have been expressed that the managers of Wessex Train Care/Eastleigh rail depot had bought out the company knowing that it had greater cash balances available than outside bidders had been led to believe. D. MacIntyre and C. Blackhurst, 'Taxpayers helped Fund Rail Buy-out', Independent, 13 Feb. 1996. The National Audit Office report, British Rail Maintenance Ltd: Sale of Maintenance Depots, HC583 (London, 1995/96) criticised the sale process for having little effective competition, for an absence of benchmark valuations and for the confusion about valuation arising from the failure of British Rail to remove the cash balances from the company prior to sale. The Public Accounts Committee Report on the same case (HC 168, 1996/97) criticised the role of the Department of Transport in particular and explicitly in relation to its failure to provide all bidders with the same information in the context of their competition with a management buy-out bid. In the light of the criticisms levelled by the PAC at the Department of Transport at the time of the buy-outs from National Bus (HC119, Lonodn, 1990/91) it is little short of astonishing that such criticisms should arise subsequently.
160. See CMBOR, Management Buy-outs Quarterly Review (Nottingham, Winter 1996/97). Buy-outs from British Rail such as Angel Trains, Eversholt Leasing, Porterbrook Leasing, Fastline Group and Scotland Track Renewal were all sold within 18 months of their initial privatisation. In addition, concerns have been expressed that the managers of Wessex Train Care/Eastleigh rail depot had bought out the company knowing that it had greater cash balances available than outside bidders had been led to believe. D. MacIntyre and C. Blackhurst, 'Taxpayers helped Fund Rail Buy-out', Independent, 13 Feb. 1996. The National Audit Office report, British Rail Maintenance Ltd: Sale of Maintenance Depots, HC583 (London, 1995/96) criticised the sale process for having little effective competition, for an absence of benchmark valuations and for the confusion about valuation arising from the failure of British Rail to remove the cash balances from the company prior to sale. The Public Accounts Committee Report on the same case (HC 168, 1996/97) criticised the role of the Department of Transport in particular and explicitly in relation to its failure to provide all bidders with the same information in the context of their competition with a management buy-out bid. In the light of the criticisms levelled by the PAC at the Department of Transport at the time of the buy-outs from National Bus (HC119, Lonodn, 1990/91) it is little short of astonishing that such criticisms should arise subsequently.
161. CMBOR, UK Management Buy-outs 1992, Annual Review from CMBOR (Nottingham, 1992).
162. For the US evidence also suggests that larger buy-outs completed in the second half of the 1980s took on larger amounts of debt and had an increasing probability of failure or needing to be restructured, especially if planned asset sales were not forthcoming, than buy-outs funded earlier in the 1980s. S. Kaplan and J. Stein, 'The Evolution of Buy-out Pricing and Financial Structure in the 1980s', Quarterly Journal of Economics, Vol.108 No.2 (1993), pp.313-59.
163. According to the CMBOR database, those large buy-outs and buy-ins which entered receivership or were restructured had an average of 77 per cent of senior and mezzanine debt in their financing structures, compared to 65 per cent for non-failed cases. In addition, larger buy-outs with higher ratios of borrowings to earnings before interest and tax were also more likely to have failed or been restructured. For further discussion see Wright et al., 'An Analysis of Management Buy-out Failure'.
164. For example, the poorly performing Herman's stores in the US were not disposed of until 1993, although the sale had initially been intended for 1990. The company also experienced several changes in senior management, including two new CEOs, as the financing institutions sought to deal with the company's financial problems. For details see Wright et al., 'Restructuring and Failure in Buy-outs and Buy-ins'.
165. Some public statements by well-known participants emphasised both learning and a view that the economy generally was more stable than in the late 1980s. See, for example, M. Prest, 'Going for It in a Big Way', Financial Times-Management Buy-out Supplement, 10 Oct. 1997, p.3. Others, however, have
166. Some public statements by well-known participants emphasised both learning and a view that the economy generally was more stable than in the late 1980s. See, for example, M. Prest, 'Going for It in a Big Way', Financial Times-Management Buy-out Supplement, 10 Oct. 1997, p.3. Others, however, have been more circumspect, such as A. Thompson, 'The Rich get Richer', Acquisitions Monthly (Nov. 1997), pp.46-7.
167. In 1997 a total of almost £9 billion was raised in closed-end funds in the UK to finance buy-outs and buy-ins; see CMBOR, Management Buy-outs Quarterly Review (Nottingham, Winter 1997/98).
168. A. Thompson, 'Morgan Stanley Crushes Final High-Yield Barrier', Acquisitions Monthly (Nov. 1997) pp.34-6.
169. Although there had been some anticipation of the introduction of junk bonds in the late 1980s - see, for example, P. Molyneux, 'US High Yield Debt and the Case for a European Market', National Westminster Bank Review (Feb 1990), pp.2-15 - this did not materialise, with there being questions about the availability of the number and size of transactions necessary to sustain such a market. For an analysis of junk bonds in the United States, see E. Altman, 'Setting the Record Straight on Junk Bonds', Journal of Applied Corporate Finance, Vol.3 (1990), pp.82-95.
170. Although there had been some anticipation of the introduction of junk bonds in the late 1980s - see, for example, P. Molyneux, 'US High Yield Debt and the Case for a European Market', National Westminster Bank Review (Feb 1990), pp.2-15 - this did not materialise, with there being questions about the availability of the number and size of transactions necessary to sustain such a market. For an analysis of junk bonds in the United States, see E. Altman, 'Setting the Record Straight on Junk Bonds', Journal of Applied Corporate Finance, Vol.3 (1990), pp.82-95.
171. M. Jensen, 'Corporate Control and Politics of Finance', Journal of Applied Corporate Finance, Vol.4 No.2 (1991), pp.13-33.
172. Referred to as 'carried interest'.
173. B. Chiplin, K. Robbie and M. Wright, 'The Syndication of Venture Capital Investments: Evidence from Management Buy-outs', paper presented at the Babson Entrepreneurship Conference, Boston, April, 1997.
174. C. Jackson-Cookland, A. Crowe and M. Pratt, 'Management Buy-outs', Bank of England Financial Stability Review, No.4 (Spring 1998), pp.57-64.