Finding way with new phenomenon; What lessons might be learnt from previous recessions? How quickly did the management buyout market recover and what are the prospects? Phil Griesbach, Director of Barclays Private Equity in the Midlands, looks at the past - in order to gain an understanding of what might happen in the future.Byline: Phil Griesbach
t was the American financier J P Morgan who is credited with undertaking the first management buyout.
His acquisition of the Carnegie Steel Company Andrew Carnegie constructed a profitable steel mill at Braddock, Pennsylvania in the mid-1870s. The profits made by the Edgar Thomson Steel Works were sufficiently great enough to permit Mr. Carnegie and a number of his associates to purchase other nearby steel mills. from Andrew Carnegie in 1901 for $489 million is reckoned to be the world's first MBO MBO
See: Management buyout as we now understand the term.
However, whether you look to the US or the UK, the management buy-out market is still a relatively new phenomenon - it was not until the late 1970s that MBOs took on any real significance. Accurate statistics for the UK buyout and buy-in market are hard to come by until the mid-1980s thanks to the Centre for Management Buy-Out Research (CMBOR CMBOR Centre for Management Buy-Out Research (Notthingham University Business School) ) - supported by Barclays Private Equity Barclays Capital is the Private Equity division of Barclays plc. They have seven offices across four countries. Started in 1982 they invested in over 350 businesses including Admiral Group and Dial-a-Phone. Typically €500m is invested per annum in 10-15 transactions. .
That gives us two recessions to examine - the early 1980s and the early 1990s, and whilst the causes of those downturns are significantly different to that of 2008/9, a number of common characteristics exist.
Back in 1979, there were just 20 recorded buy-outs with a total value of pounds 24m. CMBOR then captured the rapid growth of the market over the next few years up to 1982 when 247 deals were recorded with a value close to pounds 670m. Over the following two years, the recession of the early 1980s took its toll, deal activity was largely flat, with deal value actually falling during this period before making a recovery in the mid-1980s.
The MBO market then accelerated before once again falling away as recession struck in the early 1990s. Deal numbers peaked in 1990 at 606 with a deal value of just over pounds 3 billion but took a tumble falling to less than 500 by 1993, albeit an increase in average deal size stabilised total value at pounds 2.8 billion.
As the economy recovered so did the MBO market. In 2003, 717 deals were recorded and by 2006, with the real arrival of the "mega deal", the total value of deals stood at an all time high of pounds 27 billion. By 2008, the number had fallen to 567 and total value to some pounds 19 billion. Closer analysis of the 2008 data demonstrates the speed of decline - 356 deals in the first half of the year compared with 211 in the second. Average deal values fell dramatically also - from pounds 49m in the first quarter to pounds 12m in the fourth quarter.
Whilst the history for 2009 is still being written, completed deal activity across the market remains very subdued sub·due
tr.v. sub·dued, sub·du·ing, sub·dues
1. To conquer and subjugate; vanquish. See Synonyms at defeat.
2. To quiet or bring under control by physical force or persuasion; make tractable.
3. against any historical comparator comparator
Instrument for comparing something with a similar thing or with a standard measure, in particular to measure small displacements in mechanical devices. In astronomy, the blink comparator is used to examine photographic plates for signs of moving bodies. .
That said, if history provides any insight into the future, the record books demonstrate that after relatively flat periods of (on average) three years, activity starts to rise significantly. This would translate into a substantial predicted recovery for the MBO market in late 2010.
But the absolute trends in buyouts tells only one aspect of the story. It is also important to ask why and where such deals originated.
Buy-outs come from a number of sources, including large groups divesting of non-core operations, privately owned businesses seeking succession, public to private transactions and (more recently) secondary buyouts.
But there is also a further source: distressed businesses.
The surge in general business declines normally associated with an economic downturn undoubtedly creates opportunities for the MBO market.
Now the UK is likely to experience a prolonged pro·long
tr.v. pro·longed, pro·long·ing, pro·longs
1. To lengthen in duration; protract.
2. To lengthen in extent. period of below trend economic growth, there could be some real opportunities to inject in·ject
1. To introduce a substance, such as a drug or vaccine, into a body part.
2. To treat by means of injection. new momentum into selected businesses.
The current downturn affects the majority of sectors and has left many businesses with strong long term prospects currently focussing on managing through shorter term problems.
The number of buyouts from distressed firms might well rise significantly. In 2008, we witnessed 65 such deals, more than double the previous year's total, with a total value of pounds 182m.
Many of these buy-outs involved the acquisition of specific divisions rather than attempts to rescue whole firms.
It is too early to assess the volume and impact of buyouts from receivership receivership
In law, state of being in the hands of a receiver, a person appointed by the court to administer, conserve, rehabilitate, or liquidate the assets of an insolvent corporation for the protection or relief of creditors. in the current recession.
However CMBOR's survey evidence from the last deep recession of the early 1990s demonstrates the significant challenges and opportunities.
Evidence indicates that in many instances major financial and operational re-structuring activities are required. Given the real drivers of distress are always unique to each business, the level of restructuring required needs to be thoroughly assessed by new investors.
For most, buying from receivership is a tricky business, where value can be quickly created or destroyed.
This is borne out when you analyse exits of buy-outs from distressed companies, with the evidence suggesting many such companies continue to experience problems after the transaction. The recent exit landscape supports this mixed picture - of the 30 exits of buy-outs from receivership recorded in 2008, 19 went into receivership, seven were the subject of a trade sale and four were the subject of a secondary buy-out.
That said, a number of success stories demonstrate the potential returns achievable.
But whilst impressive returns can be made, this is territory where many potential investors often fear to tread.
We are seeing a rise in the number of enquiries and prospects for all types of deals and genuine increased levels of funding appetite/availability.
Fundraising undertaken in the three years to 2008 has added a further pounds 70 billion to private equity's spending power The power of legislatures to tax and spend.
Spending power is conferred to state and federal legislatures through their constitution. Judicial Review of legislative spending varies from state to state, but the law of federal spending informs courts in all states. , meaning the cash for investment is there.
While this is allied with a strong appetite to invest, private equity houses will continue to proceed with caution in these uncertain times, particularly when considering distressed opportunities..
Phil Griesbach, director of Barclays Private Equity in the Midlands