An overseas bank has decided to sell its UK subsidiary. The London-based management team has proposed a management buyout, but is met with an unenthusiastic response. What do you think is the best way forward?
Matthew is a director of JBC Investment Management, a wholly owned UK subsidiary of Bravura, an overseas bank that bought the business five years previously. JBC has a close-knit management team that, including Matthew, consists of four directors and the CEO, Carla. The management team has very close ties with all the incumbent staff of JBC, as it recruited most of them.
In one of the quarterly meetings with Bravura, Matthew and Carla are advised by its CEO that he has been looking at Bravura’s portfolio of overseas companies with a view to selling those that do not really fit with his new vision, and JBC is one of them. However, no immediate decision has been made, and he gives the JBC team two years to try to generate the level of returns that Bravura is seeking.
After one year, there has been an all-round improvement in business, with increased turnover and profitability, accompanied by significantly improved risk management and control processes. Matthew and Carla are confident that with a continuation of this trend, Bravura will be convinced that it should keep JBC. They are surprised, therefore, when they are called to a meeting at Bravura’s head office in Lichtenstein to be told that, notwithstanding the original timetable, Bravura now feels that an early sale is desirable. Matthew and Carla are told that the London management team will be expected to lead the process of disposal in order to obtain the best possible price for Bravura.
Matthew, Carla and the other directors meet to discuss this new development, and they are disappointed about the decision to sell, as they are concerned that a new owner might want to make changes they are not happy with and may even split up the team. During discussion with their fellow directors, Julie and Rob talk about how best to go about marketing JBC, and the idea is raised that they might attempt a management buyout (MBO). After all, they know more about the company than anyone else, and this is the type of opportunity that does not come along very often.
They consider that, between them, they might be able to raise sufficient finance, which, together with some private equity funding, should enable them to make a realistic bid for JBC themselves, and they get excited about the prospect of owning their own business. The directors arrange a meeting with the other senior executives of JBC to raise the prospect with them in order to make them aware of what is happening, and to seek their interest in taking part in an MBO. Yet while they are supportive of the principle, if for no other reason than protecting their jobs, they do not feel able to join the directors in the financial commitment. Nevertheless, they agree to stay on until the sale goes through and not stand in the way.
Serious intent
Matthew and Carla approach Bravura to raise with it the proposal for an MBO, justifying it on the basis that they are the people best able to deliver a fairly priced sale in the shortest possible time, because of their intimate knowledge of the JBC business. As an indication of their serious intent, they tell Bravura that they already have funding in place. However, they are disappointed that Bravura’s response is unenthusiastic, carrying an implication that it does not trust the management not to manipulate the sale process to favour itself against an open market sale.
Matthew’s initial thought is to tell Bravura that if it doesn’t trust him then it can find someone else to sell the business but, seeing Carla’s anxious look, he holds his tongue. The two of them return to London and meet with Julie and Rob to tell them how the trip went and what, if anything, they achieved. Although their disappointment is palpable, the group agrees that they must rethink their initial plans and formulate alternatives based on their professional responsibilities.
They talk for some time, and after several hours agree that they have a number of possible ways forward, and that they should put these to Bravura and ask them to make the decision how they wish to proceed.
The CISI verdict
Of the 62 readers who responded, there was little to choose between their views of three of the four options, which saw percentage choices of 37%, 34% and 29% for A,B, and C respectively, with no votes for option D.
In essence, there is no specifically right or wrong answer, and although no reader voted for option D, it is an entirely plausible scenario that recognises the realities of the situation. In option A, the attraction of hiring a third party to market the business is that it would remove any management bias. However, the management cannot then decide the extent to which it will be involved in the process. Either they support the shareholders or resign. From the shareholders’ perspective, though, that may seriously damage the sale prospects, and thus there must be a commonality of interest, which really is the response to all three courses of action. The owners and managers should have similar interests. Option B also may be said to recognise reality, but again, the extent to which they may be ‘supporting’ Bravura is difficult to measure, unless they are actively acting against them.
In our view, Option C would seem to offer a compromise that should satisfy both ‘sides’, since the sales process is being overseen by a third party and the management are allowed to bid, without being the ‘preferred bidder’ from the outset.
This dilemma appears in the September print edition of the Review. The results of the survey and the opinion of the CISI appear also in the December 2015 print edition of the Review.