Core issues to face

As conglomerates sell off ‘non-core’ assets, managements get the chance to try buy-outs, while small firms can grow through acquisitions.

The 1980s was a decade of diversification. The 1990s brought a shift to consolidation. So the first few years of the new millennium should be a time of opportunity for management teams considering embarking upon a buy-out — and smaller engineering companies considering growth through acquisition.

The opportunities will be presented by the many corporate groups and remaining conglomerates that are assessing their portfolio of companies, identifying those which are ‘non-core’ and then offering them for disposal, either to management or trade buyers.

This can only be a good thing for the industry, for many (but by no means all) non-core companies are underfunded by their parent groups, which are prone to cut their budgets in favour of the mainstream operations. This leads to demotivation of management, consequent lack of performance and poor results, which can produce a downward spiral.

Head office management time devoted to trying to put matters right can then become disproportionate to the returns — and management time is precious. Yet many of these businesses could flourish in the right circumstances: under the ownership of somebody who values them and wants to invest for growth, rather than a group that, probably unwittingly, sees them as an unwanted burden.

Many non-core businesses are readily identifiable to those searching for them. Normally they have come with a ‘package’ of businesses as part of a previous acquisition; often, although not always, they are small or medium-sized.

There is a wide choice of routes to take: trade sales (including cross-border deals), management buy-outs and buy-ins — subjects covered in previous articles in this series.

However, there are pros and cons for vendor and purchaser, no matter which is chosen, and the following five-point plan could be useful:

1) assess prospective purchasers internationally in order to be confident that there is likely to be a reasonably good appetite for the company;

2) address the prospects of a successful management buy-out as early as possible — the management team knows the business better than anybody else;

3) if the business is offered for sale with certain forecasts, the management team must be committed to meeting them;

4) maintain confidentiality to ensure there is no adverse impact on the trading of the subsidiary;

5) if there is any intra-group company trading ensure all trading agreements are formalised.

Conflicts of interest

A group considering offering a subsidiary to the management team must be aware of the conflict of interest that may be created. Similarly, a management team that has accepted the possibility that the subsidiary may be offered for sale should still be cautious about making an approach to buy — the timing may be wrong or they may have made mistaken assumptions.

The team must be sure it has the managerial and entrepreneurial strength to see the deal through; if it is in doubt it should be prepared to consider a management buy-in — the involvement of an outsider with a proven track record in management who is willing to accept the challenge and lead the team to success.

To eliminate the possibility of an ill-judged request to pursue a management buy-out, with all the associated adverse risks, management teams are well advised to use a corporate finance adviser to act on their behalf in total confidentiality. If the resulting answer from the parent company is ‘no’, nothing has therefore been lost.

In many ways it is easier for a potential trade buyer to steal a march by identifying a possible target, analysing it from the outside and making the approach direct to the prospective vendor.

It is, however, essential for such a potential buyer to be able to show financial credibility at the earliest stage; to outline the benefits of the deal and assure an ability to complete a transaction quickly; and to capitalise on the potential that has hitherto not been allowed to flourish — in fact to be able to make the offer so attractive that it will merit serious consideration.

If the proposal is not tasty enough there is the danger that the present owner, having received the unsolicited approach, may create a covert auction to sell the subsidiary and may leave the management team out in the cold.

Should negotiations begin in earnest it is prudent for a trade buyer to establish whether or not the management has made an approach — a negative answer may say a lot about the commitment of the team.

Chances to buy non-core engineering businesses will abound in the next few years, putting all concerned in a win-win situation. Groups seeking to streamline their operations will be able to do so, and put cash in the bank at the same time; management teams will have the chance to be masters of their own destiny; and successful owner-managers of companies with funds or financial backing to expand will have the chance to build their empires.