Management Buy-Outs and Venture Capital: Into the Next Millenium

By Mike Wright; Ken Robbie | Go to book overview

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.


Notes
1.
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.
2.
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).
3.
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 advisor.
4.
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.
5.
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).

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