Ready to deal

People skills are important for accountants working in all areas of public practice. But there are few transactions for which an accountant takes on the role of counsellor and general shoulder to cry on.

Accountants working in the booming UK management buy-out market say that playing this role goes with the territory – guiding clients through a process which many describe as an emotional roller coaster.

Stephen Baker, head of corporate finance at Grant Thornton, says many clients compare the MBO process to getting married or moving house. He comments: ‘The role of the adviser is to understand how traumatic the process is and to act as a shoulder to lean on through the process.’

Peter Jacobs, head of European private equity advisory services at PricewaterhouseCoopers, expresses similar sentiments: ‘If a deal hasn’t cratered three times before we actually complete, then it is a very unusual transaction. One of our jobs is to manage the emotional cycle that the management teams experience.’

The fact that fees for advising on MBOs are generally charged only when deals are successful injects yet more tension in the process. A failed deal means both a distraught client and substantial costs being written off.

But despite the tensions, Jacobs and Baker agree it is the close involvement with clients in MBO deals that makes them rewarding, as does Michael Stevens, UK head of MBO services at KPMG Corporate Finance. ‘The MBO itself is a terribly satisfying thing.

You are working with a bunch of people you get very close to and develop a very great respect for. It’s a traumatic three or four months, but you end up achieving something quite special,’ he says.

The three advisers are operating in a thriving market. The value of UK MBOs reached record levels this year, with investors and financial institutions more eager than ever to invest in them. Deals are growing ever larger and more complicated, and variations on the traditional MBO have grown in importance.

There has been a particularly sharp rise in the number of management buy-ins, in which investors back experienced executives to take control of businesses with which they have not previously been associated. Both Ernst & Young and Grant Thornton are actively seeking suitably experienced business executives to work with on identifying and exploiting MBI opportunities.

KPMG figures show the value of larger UK MBOs and MBIs (more than #10m) in the first half of 1998 was #6.97bn – more than double the #3.26bn recorded in the first half of 1997 and 40% above the #4.94bn struck in the second half.

But will jittery markets and widespread fears of a world recession hit the booming MBO market?

All three advisers say they are confident the MBO market will remain active in the event of an economic downturn.

Jacobs says: ‘In the last recession, the number of deals did not change dramatically. What changed was their value. The very big deals stopped because the high-yield bond market had gone away. A number of the more adventurous funding structures were no longer possible.

‘Having said that, funding structures have become more conservative than last time round, so I don’t expect to see quite as many problems if we do go into recession.’

According to Jacobs, it was not stock market falls that hurt the market, but stock market fluctuations which led to uncertainty and pricing difficulties.

Indeed, he suggests a recession could, in some respects, encourage investment in MBOs: ‘Some venture capitalists will take a contrary view and say that there are always deals to be done’. And declining competition among investors in a recessionary period, he says, may encourage some venture capitalists to invest.

‘Uncertainty makes people nervous,’ Baker comments. ‘There are already signs that the banks are drawing in their horns. But there shouldn’t be a great slump in the level of activity. It will be much more important to look at the strategic position of a business and make sure it can cope in unstable times.’

The MBO market is likely to be helped through any downturn by what a KPMG report earlier this year described as an ‘ocean of liquidity’ in the hands of the investing institutions. A growing track record of past MBO successes, it says, is encouraging the institutions to use more of their funds to invest in private equity.

Even if a recession starts to bite, adds Baker, venture capitalists still have a lot of money which they will want to put somewhere. Aside from dealing with recession fears and fluctuating stock markets, accountants advising on MBOs face another challenge – in the form of competition from the investment banks.

Their corporate finance arms have traditionally fought shy of the MBO sector, instead concentrating their efforts on the M&A advisory market, where the competition between investment banks and big accounting firms is more intense.

Stevens comments: ‘More and bigger deals are attracting merchant banks into the field, particularly where the deals are worth more than #500m.’ But he adds: ‘There is a lot of room in the market. Maybe they will pressure us a bit but, given their cost bases, I don’t think they can beat us on price.’

He also comments on the steep learning curve the banks have to go through as they enter the field. ‘As they get into MBOs they cannot believe the anguish we go through in terms of keeping all the balls in the air – it’s quite tough, more difficult than a straightforward company transaction,’ he says. And there is no sign that MBO deals are going to become any less complex.

Accountants played a leading role in kick-starting the UK MBO market in the 1980s by introducing venture capitalists, for whom they were doing due diligence work, to other clients seeking funding.

These MBOs were traditionally instigated by a group of managers wanting to take over the businesses they ran. But an increasing number of deals are being driven by vendors, particularly conglomerates seeking to divest themselves of non-core activities.

More deals are being driven by venture capitalists seeking opportunities to invest, and some are now working with chief executives on finding MBI opportunities.

The popularity of MBOs has sparked the development of an auction process, where investors are invited to bid for a stake in a business, in many cases replacing the traditional process by which managers went out to seek funding by doing the rounds of the venture capital houses.

There has also been a trend for private equity houses to invest in public companies. Specialist engineering group B Elliott is an early example of a company which has transformed itself from a public to a private company, by means of an MBO, in a deal completed in April and advised on by Coopers & Lybrand.

With growing sophistication and competition in the UK market, investors and accounting firms are turning their attention to continental Europe, where the MBO market is far less developed than in the UK.

Increasing interest from US investors in both the UK and continental markets is adding to the competition and contributing to the development of continental markets. Stevens comments there is a perception that good value ‘steal deals’, no longer available in the competitive UK market, are still possible in continental Europe.

Accountancy firms are bolstering the size of their MBO teams to deal with these new opportunities, and the larger firms have MBO specialist networks which extend throughout the UK and Europe. These networks help their competitiveness against both investment banks and specialist corporate finance boutiques.

Accountants have also widened their role in MBOs, now sometimes acting for vendors or venture capitalists, but management teams still represent the majority of their MBO clients.

MBO work is a good fee-earner in its own right, but more can be earned by marketing other services on the back of a deal. Stevens thinks the fees earned by a corporate finance team in an MBO can be tripled by providing other services. These include corporate tax planning for the transaction, and personal tax and pensions planning for the managers involved. In-house property consultants and forensic specialists can also get in on the act.

As the larger firms focus their attention on ever bigger and more complex deals, and on continental Europe, opportunities for smaller firms could be opening up at the lower end of the market.

As the experience of the larger firms has shown, MBOs provide an opportunity for accountants to exercise their project-management skills and offer a full range of services.

The close relationship that develops between client and adviser during an MBO means that, once the deal is completed, the client is likely to remain loyal for some time.

Chris Quick is a freelance journalist.