I have often been struck by the contrasting behavior, in the acquisition context, of successful private businessmen on the one hand and the officers of large, generally public, companies on the other. To merge with or even acquire another firm frequently seems, for the private entrepreneur, to require intellectual, emotional, spiritual, physical and psychological effort. Deliberations can take months and not infrequently years, as those involved in a courtship rather than a business transaction, ingratiating and petulant by turns, the participants go far beyond consideration merely of balance sheets (buy by no means ignore them).
By the end, however, they do appear to have a clearer, more realistic picture of each other's operations- and of how, as a practical matter, they would function as a unit - than those who move pieces around the larger corporate chessboard. And so, it might be said, they should. After all, it is their own money that is involved; and to protect the prosperity of a long-established family business may seem a worthier challenge than maximizing such a bloodless measure as earnings for every share. But should that be so?
When one company decides to acquire another, it is unlikely that it will actually face competition from a private family business. But nowadays it is quite likely that the management of the target company will itself wish to buy it. To what extent do, and should - the considerations of those involved in the buyout, who might be regarded as being nearer to the situation of a private business than a large corporate acquirer, differ from those of the corporate acquirer?
Buyouts can rarely compete with large trade buyers. On that point, at least, most of those involved in buyouts appear to agree. In any negotiation a price will be reached which only a corporate buyer can afford today. So on the face of it either the corporate buyer is prepared to accept a lower return on his investment, or else he can achieve the same return by virtue of strategic or synergistic benefits. Actually, thins are not quite that simple. The return calculations of the buyout team will take account of the fact that the consideration is to be significantly financed with borrowing; which, by thus 'gearing' or 'leveraging' the relatively small equity component, greatly enhances the potential return on that equity. Most buyout practitioners will claim to earn an average internal rate of return on investment of not less than 35 per cent a year. Certainly that is the target they will be seeking to achieve. Typically two-thirds of that return (around 20 per cent) will result from the effects of gearing, with the balance coming from the company's own growth. Payment of a significant premium over the buyout price would therefore suggest either that the corporate buyer is un ambitious on behalf of his shareholders or else believes he sees a way of earning the same rate of benefit from synergies as the buyout investor receives from leverage. (Buyout-style levels of gearing are not an option for quoted companies).
Meanwhile, one notes, the seller of the company involved appears unable to earn a return on the investment as high as either of the two bidders - which at 35 per cent is not unrespectable in the UK in the early 1990s. This, of course, is a situation which constantly recurs. An acquiring company may initiate things, incumbent management reacts and the vendor is offered a choice between a corporate buyer and a (leveraged) management buyout. As matters get under way and advisers cluster round, the process takes on a life of its own. It helps to look at some of the thinking which underlies it all.
By the end, however, they do appear to have a clearer, more realistic picture of each other's operations- and of how, as a practical matter, they would function as a unit - than those who move pieces around the larger corporate chessboard. And so, it might be said, they should. After all, it is their own money that is involved; and to protect the prosperity of a long-established family business may seem a worthier challenge than maximizing such a bloodless measure as earnings for every share. But should that be so?
When one company decides to acquire another, it is unlikely that it will actually face competition from a private family business. But nowadays it is quite likely that the management of the target company will itself wish to buy it. To what extent do, and should - the considerations of those involved in the buyout, who might be regarded as being nearer to the situation of a private business than a large corporate acquirer, differ from those of the corporate acquirer?
Buyouts can rarely compete with large trade buyers. On that point, at least, most of those involved in buyouts appear to agree. In any negotiation a price will be reached which only a corporate buyer can afford today. So on the face of it either the corporate buyer is prepared to accept a lower return on his investment, or else he can achieve the same return by virtue of strategic or synergistic benefits. Actually, thins are not quite that simple. The return calculations of the buyout team will take account of the fact that the consideration is to be significantly financed with borrowing; which, by thus 'gearing' or 'leveraging' the relatively small equity component, greatly enhances the potential return on that equity. Most buyout practitioners will claim to earn an average internal rate of return on investment of not less than 35 per cent a year. Certainly that is the target they will be seeking to achieve. Typically two-thirds of that return (around 20 per cent) will result from the effects of gearing, with the balance coming from the company's own growth. Payment of a significant premium over the buyout price would therefore suggest either that the corporate buyer is un ambitious on behalf of his shareholders or else believes he sees a way of earning the same rate of benefit from synergies as the buyout investor receives from leverage. (Buyout-style levels of gearing are not an option for quoted companies).
Meanwhile, one notes, the seller of the company involved appears unable to earn a return on the investment as high as either of the two bidders - which at 35 per cent is not unrespectable in the UK in the early 1990s. This, of course, is a situation which constantly recurs. An acquiring company may initiate things, incumbent management reacts and the vendor is offered a choice between a corporate buyer and a (leveraged) management buyout. As matters get under way and advisers cluster round, the process takes on a life of its own. It helps to look at some of the thinking which underlies it all.
