In May 1987 the Centre for Management Buy-Out Research at the University of Nottingham published the results of a study of UK management buy-outs that had subsequently been floated on the stockmarket. It showed that in the 1985/ 86 financial year MBOs accounted for over one-fifth of all flotations on the Un- listed Securities Market, London's second 'tier' market where most initial public offerings are made.
The 102 companies covered by the report were intially sold to their manage- ment teams for a combined sum of £820m. Their combined value by the time of their flotation had risen to @1.5bn. By the time the report was published this figure had risen to £2.4bn. Buy-outs in general have proved very good invest- ments, out-performing conventional flotations very comfortably, particularly during the first two years after flotation. The report showed that buy-outs that went for a full listing on the London stockmarket in 1984, either as initial public offerings or as promotions from junior markets, had increased their aggregate market value by nearly 113% by February 1987, compared to an increase of less than 96% for the market as a whole.
British examples of successful buy-outs include First Leisure (bought out from Trusthouse Forte and Thorn EMI by Lord Delfont), the National Freight Consortium (bought by its staff from the government), Jeyes (bought out by management from Cadbury Schweppes) and Mecca Leisure (bought out by Table 2 Management buy-outs
Total number and value of buy-outs in the UK 1967-1986
Year No. Value Average value
(£m) (£m)
1967-76 43 n/a n/a
1977 13 n/a n/a
1978 23 n/a n/a
1979 52 26 0.50
1980 107 50 0.47
1981 124 114 0.92
1982 170 265 1.56
1983 205 315 1.54
1984 210 415 1.98
1985 229 1,150 5.02
1986 261 1,210 4.64
n/a--not available
Source Trends in UK Buy-outs, 1987 Edition. Venture Economics and The Centre for Management Buy-out Research.
INFORMATION SOCIETY = KNOWHOW SOCIETY
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management from Grand Metropolitan). Most buy-outs work well.
Their success is due to a high level of motivation, greater freedom and a more intense focus. One buy-out leader estimated that in any subsidiary of a group of companies there will always be, however well the group is run and however tight the financial disciplines it imposes on its subsidiaries, at least 10% of cost that can be 'sweated out' by a cost-conscious management team.
Highly motivated management, obsessed with a single business idea, can turn an ailing subsidiary into an independent high-flier almost overnight.
· The case of AGA
In the final decade of the nineteenth century the Swedish engineer Gustav Dahlen discovered how to produce and distribute the explosive gas acetylene. On the basis of this knowhow he formed the AGA company.
Dahlen is best known for the gas-driven lighthouse but he was also active in many other high-tech areas which had nothing to do with gas such as radios, television, infra-red cameras and submarine periscopes.
And though none of these new businesses spawned by AGA's engineer- dominated culture could match the success of the core gas business, the man- agement remained firmly wedded to the diversification idea. In the mid 1960s they became even bolder and began to invest the mature gas division's rich cash- flow in medical equipment and electronics, two of the most fashionable growth markets of the day, in an attempt to build up two new 'legs' for the business.
The result was disastrous.
Ten years later a new management team launched the operation 'back to gas'.
All the high-tech companies were collected in one company - Pharos - which was floated off on the stock exchange. AGA kept the gas and concentrated its management and engineering resources on its old core knowhow. Even the internal services were sub-contracted and all buildings not directly connected with gas production were sold.
To-day AGA is entirely concentrated on its core gas business and is compet- ing very successfully with the world's large international gas producers.
· Lessons to be learned
Analysts said AGA's failure was because its engineers lacked market orientation.
Just as plausible an explanation is that the company deployed its management resources in too many areas where it had no knowledge. The managers could not cope with all the unfamiliar new markets, suppliers and products. The same can be said of Alfa-Laval, Sinclair and Swedish Match.
Divestment and concentration on the core business have been key management concepts during the early 1980s, not just in Sweden and the UK but all over the world. Profitability has increased and the slimmed-down, focused companies have regained much of the strength lost during the diversification binges of the previous decade. There are also many examples of successful buy- outs from old, disillusioned conglomerates. Buy-outs are regarded as
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MANGING KNOWHOWamong the least risky investments for venture capitalists. The lesson is clear.
Focus on core knowhow is a key success factor whatever industry you are in.
The rapid development of the information society is affecting every business in every sector including 'traditional' industries like farming. Many chief execu- tives have learned from bitter experience that expanding into knowhow areas where they have no competence can cost an arm and a leg. They have also learned that it is equally dangerous to deploy resources on too many knowhow fronts at once.
But though focus on core knowhow is a necessary strategy in the information society it is not a sufficient one. As we shall see, focus on core knowhow is just one of 10 key success factors in the new business environment.