MBI, no longer a dirty word

MBIs were all the rage back in the mid-90s. Indeed, such deals rocketed from just three to 111 between 1991 and 1997 in the UK alone, according to unquote" data. However, after hitting their peak in 1997, MBIs fell out of favour with private equity houses, management teams and lenders alike. In 2005 the number of MBIs recorded in the UK fell to just 11, and over the last three years they have hovered around even lower levels.

Although the number of deals completed in recent years does not point directly to an MBI renaissance, the tide is definitely turning and industry practitioners are predicting a comeback. "In the lower mid-market especially, we are seeing an increased number of MBIs this year and private equity houses seem more positive about these types of deals," says Adam Crossley of law firm Speechly Bircham.

There have even been a string of new companies set up solely to facilitate MBIs. In 2010, Rob Chapman set up Cadenza Partners. After setting up a dedicated equity and acquisition practice in a blue-chip headhunting group, he spun the business out to form Cadenza. Furthermore, Harry Cross, who has worked with numerous UK private equity-backed businesses, established MBI-focused Director Dealflow in 2012. The formation of intermediaries around MBIs is a definite indication of the rising popularity of these deals.

Once viewed as the epitome of PE’s destructive extremes, MBIs are shedding their bad reputation

"Back in the late 1990s and early 2000s, MBIs had been pushed to the extremes and there were even cases of entire senior teams, from top to bottom, being fully replaced," explains Stuart Marcy, corporate finance director at Menzies Corporate Finance. This left deals exposed. Without someone in the company with in-house knowledge, or an awareness of potential dangers and pitfalls, an increasing number of MBIs fell over.

Buyout houses and banks were quick to spot the failure rate of these deals and soon enough "MBI" became a dirty word. "Eventually MBIs trailed off in the mid-2000s when enough deals had fallen over. Banks and private equity houses took a long hard look at these deals and it wasn't a pretty sight," recalls Marcy.

MBIs in disguise
However, rather than disappearing altogether, MBIs took on a new guise as buy-in management buyouts, or BIMBOs; management teams combining both existing management and new blood. Much like the case for bringing in management consultants, a fresh pair of eyes on a business can often achieve results. But it is vital that experienced members with a good understanding of the company's culture, history and staff are retained.

In today's environment the need for sector specialists and experienced professionals with relevant track records is essential. "In the MBI heyday, all that was required in some cases for private equity houses to create new management teams was general management expertise – big players with impressive CVs but not necessarily in the particular sector in question. There was a view that a good manager could manage anything," says Marcy.

MBIs or BIMBOs over more recent years have largely focused on the experience and success of incoming management. Last month saw Maven Capital Partners backing the £9m BIMBO of subsea oil & gas supplier HCS Control Systems alongside the Simmons Parallel Energy Fund and Front Row Energy Partners. The deal saw the management team bolstered by Front Row directors Tony Kitchener and Brett Lestrange entering the company as business development director and CEO respectively. Meanwhile, Neil McGuiness was appointed as the company's new CFO, and Greame Coutts, formerly of Petrotech and Expro, was brought in as non-executive chairman. The investment in HCS is a clear example of how MBIs have evolved, with each new team member bringing with them a great deal of sector expertise.

With the rise of operating partners within buyout houses, arguably the bulk of today's deals involve some aspect of the traditional MBI, with an ever increasing number of partners taking up positions on the board. However, the tendency to label these deals simply as buyouts highlights the residual negativity still attached to MBIs.

 

 

The notion that MBI deals are one the rise, in whatever form they now exist, doesn't automatically mean they are risk-free. On the contrary, MBIs are still one of the riskier deal types in the M&A spectrum. Adam Crossley of Speechly Bircham outlines his essential steps to de-risking MBIs

– Build a strong relationship between new management and buyout house

It is essential to build a good level of trust between both parties. The incoming management team will typically speak to a number of private equity houses so an interested private equity house will want to make sure they have exclusivity before committing significant time and resources.

Furthermore, unless the management team has negotiated exclusivity with the vendors, it will need comfort that the private equity house doesn't do the deal without them. To avoid any pitfalls here, both sides should seek to agree equity terms between themselves at the earliest stage possible and enter into an exclusivity agreement based on these.

- Extensive due diligence

Given the lack of an inside story from the incumbent management team, there is an even greater emphasis on due diligence. Without an initial steer from existing management, there is a danger that adverse findings will come out later in the day than on an MBO. It is therefore advisable to front-load due diligence and warranties and disclosure in order to flush these issues out as early as possible.

- Incentivise incumbent management

By offering incentives linked to the future success of the target company, such as equity in the acquisition vehicle, the team are far more likely to assist the deal itself and point out any areas of concern. This may not always be practicable.

- Nurture the relationship between both management teams

Unfortunately easier said than done. Where members of the incumbent management team are staying on there is clearly potential for friction with the new management team believing they can do a better job. On top of that, there is the possibility of duplication of roles and redundancies. However, keeping key members of incumbent management onside is invaluable in ensuring a smooth transition following completion of the transaction.

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