Management buyouts stand good chance of success

By Russell Florence

Friday 3rd May 2002

Overseas studies show more than half of all acquisitions fail to meet their objectives, yet investors keep buying businesses and acquirers keep making the same mistakes.

A global survey conducted by KPMG in 2001 found only 30% of the acquisitions surveyed created value for shareholders, up from 17% in the 1999 survey.

I see no reason that the New Zealand experience should be any different from that experienced overseas.

One important factor that often influences the success of any acquisition is the vendor's reason for selling. Research undertaken by the Centre for Management Buy-Out Research in the UK identifies the two most common reasons given for selling a company to management as the lack of strategic fit to the rest of the organisation and the retirement of the owner.

In KPMG's experience MBO companies are not normally in distress, have a strong asset base and strong management. This in itself perhaps suggests that the odds of an MBO succeeding would be higher than other types of acquisitions.

There have been some recent examples of MBOs in New Zealand where the success has been stunningly obvious. The reasons for these successes vary but there are factors that are common to many successful MBOs.

The MBO team has the ability to turn intangibles such as culture and a strong management team more easily into success factors. Some acquisitions see the acquirers change the culture of a business they acquire, sometimes intentionally and sometimes not.

"By contrast the management team in an MBO have often created the culture that is being acquired and see no reason for drastic changes. This stability helps the business focus on the real job at hand, creating shareholder value.

The managing director of a leading New Zealand printing company that was recently acquired in an MBO identifies this as a major success factor: "Management knew the company better than anybody else. Management felt in control of important intangible aspects of the business, such as culture and management team security."

The MBO team becomes more motivated by the increased financial stake it has in the business. A chief executive who recently completed an MBO sees this as an important factor in the success of MBOs.

"Vendors are usually cashing up to assume a more relaxed lifestyle, whereas we are at the other end, with plenty of motivation," he said.

The MBO team is generally in a better position to assess the opportunities and risks a business faces than a third-party acquirer, even after an extensive financial and commercial due diligence. Acquisition forecasts are therefore realistic and the level of debt that requires servicing is kept to manageable levels.

In addition management has a strong incentive to reduce that debt to increase the "buffer zone." This tends to drive increased performance, arising from both increased sales and reduced costs, as attention is focused on increasing that buffer zone.

John Anderson, chief executive of Waikato Milking Systems, which he and other management acquired from the US parent, DEC International, considers "getting the acquisition debt out of the way is the number one focus of many MBOs."

Finally, the MBO team has a better sense of the growth potential of the business and therefore makes a better assessment of value as well as being better able to unlock hidden value.

For example, the level of support provided by suppliers often increases when they are dealing with an MBO team. Although there may be a reduction in the level of security provided by the business in terms of financial capacity, anecdotal evidence suggests suppliers are more co-operative in working with an MBO team rather than with a large corporate.

"It makes a big difference being able to deal with your major customers as an owner. They are more likely to trust you when it comes to investing in establishing your products in their markets," Mr Anderson said.

The stated objective of most acquisitions is to enhance shareholder value. Anecdotal evidence suggests MBOs are more likely to succeed than most.

Russell Florence is a partner in KPMG Corporate Finance

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