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 from Andrew Carnegie in 1901 for $489 million is reckoned to be the world's first MBO 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) - supported by Barclays Private Equity.
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 against any historical comparator.
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. …