Insider Business Club: sale of the century

Will the management team stay onboard?

Mark Barrow, director and head of private equity Brothers

In my experience, it is very rare for a management team who have had their
own autonomy and been running their own business to go into a corporate and stay
there. The practical advice is just to assume that the management team isn’t
going to stay because, time and time again, they go.

After you have been running your own business, it is very difficult to become
the divisional manager again. It is just totally different. So I think that
perhaps my advice in terms of trade buyers buying private equity-backed
businesses is that they’re very good businesses to buy.

There is a bit of a perception about underinvestment in private equity. I
don’t really see that. There is no doubt that the business is run for cashflow,
but it is also run for exit, so I would naturally assume that it is going to be

I would say that they’re good businesses. They’ve come to the end of their
fund-holding period, and want to sell it. That business has probably got a lot
more growth in it. Private equity firms are fundamentally traders, and therefore
know that they need to leave something in it for the next person.

The market’s picked up where it left off after 2001 basically. A very buoyant
mergers and acquisitions market calmed down after 2001 and I think what you then
found was that private equity firms stayed out of the market for at least a year
through to 2002, but then carried on investing. I think increasingly you will
see corporates coming back into the market investing as well. Certainly from our
point of view, we are seeing record levels of mergers and acquisitions.

How hard is it for a buyer to integrate an acquisition?

Angus Knowles-Cutler, partner at Deloitte Merger Integration

I have been working for the past 12 years with about 20 of the FTSE 100,
reviewing their integration plans, and people are increasingly taking
integration – the back end of the M&A transaction – more seriously.

It’s a matter of review and sometimes a bit of science around it. I’ve
compared what people were doing five, seven and eight years ago to what they are
doing now, in terms of how quickly they have appointed somebody to facilitate
the integration director, how quickly they get their high-level blueprint out,
how seriously they take integration. UK plc is improving all the time in terms
of the process that it follows.

The reason it’s improving is that people have had to get sharper because what
UK plc has got is the ability to finish the story. But also the analysts sitting
around listening to the CFO and the CEO are more cynical about the promises made
around synergies. So you have to back it up with a better process. It’s in the
external dynamic – private equity pricing, cynicism from the market about the
ability of people to execute on what they promise – that’s driven a better

A lot of my life is spent on integrations, but a third of it is spent on
separations, on disposals, buy-side and sell-side. Something I’ve noticed over
the years is that sometimes for corporates, disposal almost seems like a badge
of shame.

But I’ve also noticed they actually tend to be rather successful. They are
successful from a shareholder point of view. And they are often successful from
the point of view of the management team that goes with the disposal. It seems
to bring a new focus, a new lease of life.

What really prompts a business into a sale?

Seth Shaleen, managing director at MacNamee Lawrence &

I can think of three reasons why corporates dispose of businesses. It can be
as simple as the corporate observing that in the market there are buyers out
there – private equity or otherwise – who are prepared to pay a higher
valuation, or price, than the corporate thinks the business is worth. Therefor
e, it sells it because it’s a smart trader thing to do.

The second reason is that sometimes big corporations go through periods when
they come under intense pressure from shareholders to restructure and to do it
quick. Often they get out pretty blunt instruments to perform the restructuring
and start cutting everywhere without perhaps as much discrimination as they
would apply if they had more time to think about it. In those situations,
private equity firms stand to make potentially good deals as well.

The third is where companies have a very keen understanding of what their
rate of return targets are. They get out of businesses that they perceive to be
growing below, or adding value below the rate of return they expect, and they
get into businesses that they expect to be generating higher returns.

The fizz in this business is all in the three months leading up to a deal. In
that time, you’re competing and trying to make sure you win and get your foot in
the door. Then you can close the deal and go on holiday.

What is probably driving the market is a couple of trends in the private
equity market. There is a tremendous amount of undeployed capital – we often
refer to it as ‘dry powder’ – and also the ability of private equity firms to
debt-finance some transactions that they wouldn’t have been able to debt-finance
in 1999 or 2000.

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