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Recognising the golden opportunity in management buy outs Back  
Paul Keenan and Orlagh McKeon explore different types of management buy outs are such an opportunity for Irish companies and looks at some of the options available.
Olympic fever well and truly gripped the nation as we watched Sonia O’Sullivan lead the charge in the long distance events. Unlike the 100 metres, which is fast paced and short lived, Sonia’s race required a well-planned tactical strategy. A remarkably similar comparison can be drawn between return on investment for dot.coms versus that of more traditional sectors. In the current environment MBO opportunities, like the long distance track events, are emerging as having mass appeal with Irish audiences.

Many equity providers are finding themselves over-exposed in the dot.com market and are looking to balance their portfolio. Traditional MBOs offer investors the security of a historical track record, an established market, a revenue stream and most importantly an experienced management team, elements which are sometimes lacking in the volatile dot.com marketplace. The conditions for MBOs have never been better and should be looked at as a golden opportunity.

We believe, from our own experience and research, that the MBO market is much larger than reported. Furthermore, would-be MBO candidates can look forward to an increasing supply of fresh prospects. Large public companies are consolidating, restructuring and disposing of non-core assets and owner managed businesses seek to realise some of their wealth in a more tax-friendly environment.

A number of catalysts are now in place, which will promote MBO activity in Ireland:

Availability of funding, with an increasing population of both domestic and foreign equity backers present in the market, competition amongst equity providers is fierce.

A strong, buoyant economy with low interest rates, and banks which are more supportive of cash flow lending is resulting in more imaginative deals.

Capital gains tax at 20 per cent is incentivising owners to sell their business. Trade sales are difficult and expose the company to competitors scrutiny, whereas an MBO sometimes offers an easier exit route.

Divestment is a catalyst for growth as multinationals are increasingly opting to focus on core activities, which leads to the disposal of niche businesses.

The Irish market by definition is small, so it is becoming increasingly necessary for indigenous firms to expand into foreign markets in order to achieve growth. One such deal driven by the desire to expand into foreign markets was Qualceram effective acquisition/ management buy in of Shires.

So why is the level of MBO’s in Ireland not going through the roof? The reason is simple - managers are failing to recognise the opportunities, which are literally lying on their own doorsteps.

How can you spot the chance? There are a number of tell-tale signs to look out for.

Family Businesses: There is a wealth of opportunity for MBO’s in the family business sector, where there may be no apparent successor to take over the reigns. Observe what kind of role the owner-manager plays in the business. Is he/she approaching retirement age, ill or just no longer motivated to drive the business.

Public to Private: Adare and Clondalkin’s departure from the public arena will be the first of many unless the stock market recognises the low valuation placed upon some strong businesses.

Financial difficulties: There are always winners and losers in business and sometimes one company’s downfall can be another’s opportunity. Witness as an example the spate of MBO’s from Powerscreen.

Partial MBO: The ?10 million partial MBO of Kitchenware is an example where an existing owner (Gowan Group) saw the opportunity to share the risk/reward of an aggressive acquisition strategy with the management, which in this case was to consolidate the houseware products sector in Europe.

LBO’s: Banks are now more aggressive in supporting ‘cash flow deals’ where the MBO’s can be funded purely from debt (Allegro Professional).

Institutional led Buy-Outs: For major deals such as C&C, the larger private equity houses are prepared to take the lead role and bring the existing management team with them.

MBI: Although they can be difficult to complete, management buy-ins can be very successful, especially when completed in conjunction with an existing team (Let’s Talk Phones).

Case Study: A good example of a successful MBO, who BDO Simpson Xavier advised, is Qualceram:

Having completed an MBO of a bathroom ceramic company in 1988 from Armitage Shanks, the MBO team then brought the company to flotation in 1997 and realised a portion of its value. More recently Qualceram have completed one of the most ambitious deals this year in a ?60 million take-over of Shires, which was three times its size. This deal was funded with ?12 million in equity with a significant proportion coming from ICC Venture Capital and the balance in debt. Qualceram today is a quoted company where the management still retains approximately 45 per cent of the company, and the prospects for further expansion have never been better.

So the conclusion - get in training! Athens is only four years away and your own chance of gold awaits.

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