reported here of cases where financial difficulties have occurred without
covenants being breached.
In addition it would be of interest to develop more powerful measures of
banking relationships than those used here, to better investigate their costs and
benefits. The finding that management accounts are often monitored less
frequently than they are submitted requires further investigation, in particular
regarding the actual role of accounting-based covenants and periodical accounting
reports to bankers. For example, do bankers see the regular provision of
accounts as an important discipline on management, is the frequency of detailed
scrutiny related to the age of the relationship and the establishment of a sound
track record, and so on?
In providing both new evidence from the UK and Holland and comparisons
with previous studies in the US, the paper has suggested that there are differences
in covenant use not just between different types of lending but in the same type
of lending in different countries.
Finally, this research has examined the operation of covenants and the
relationships involved from the point of view of the banks. Further work
might usefully examine experience from the position of the managers involved
in the MBOs.
According to monitoring by the Centre for Management Buy-out Research and the Dutch
Management Buy-out Research Unit, there were 3361 buy-outs and buy-ills completed in the UK between 1990 and 1995 for a total transaction value in current prices of £21 291 million
and 279 buy-outs and buy-ins in Holland in the same period for a total transaction value
equivalent to £2384 million. Only France and Germany saw more transactions in this period
than Holland, though their economies are substantially larger. For further details see Initiative Europe/CMBOR
, Europe Buy-out Review, Initiative Europe, London, Seventh Edition, 1996.
Evidence relating to the motivations of management in undertaking a buy-out also emphasises
their desires to control and develop their own business (for example, Wright et al., 1992).
It is also possible that MBO managers and advisors collude against the debt supplier to
complete a transaction because advisors are typically remunerated largely through completion
fees. However, countering this point is the argument concerning reputation effects, such that
behaviour of this kind may result in the banks being reluctant to deal subsequently with the
See, for example, Thompson et al. ( 1992). It may be argued close relationships between venture
capitalists and a network of banks established to effect transactions, as is often the case, may
go some way to mitigating agency cost problems. However, the point remains that ultimately
there are potential conflicts of interest between venture capitalists and banks.
Financial assistance refers to the giving of securities on the assets of the company for the
purchase by third parties of shares in its own capital. In the UK there are exceptions to this
general prohibition so that in a buy-out subject to certain substantive and procedural safeguards
relating to the solvency of the company financial assistance may be given. The giving of financial
assistance in Holland is absolutely prohibited, except for certain specific exceptions involving
smaller companies with distributable reserves and for the transfer of shares to employees, both
for the company in which shares are acquired and for that company's subsidiaries. For further
elaboration of these legal issues in the UK and Holland see O'Neill ( 1995)