The management buyout is coming back into fashion for marketing agencies
In this column we usually feature acquisitions by large entities of smaller ones, or mergers between roughly equal entities. Management buyouts (or MBOs as most of us know them) are less common. But with the economy picking up, banks – and, increasingly, private equity houses – are more willing to invest in this fascinating form of buyout.
My ongoing interest in MBOs was piqued by last week’s buyout of Engine Group for £100m. It wasn’t really an MBO, but the management did get a 15 per cent share, and Engine remains independent from any other group.
In principle, and in law, an MBO doesn’t differ that much from any other acquisition. What does make the MBO different lies in the position of the buyers as managers of the company, and the practical consequences that flow from that. The due diligence process that consultancies like my own partnership, Green Square, aid buyers and sellers with is likely to be limited, as, naturally enough, the buyers already have full knowledge of the company available to them.
The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management know more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company.
There are of course some concerns over corporate governance, and some M&A watchers feel that MBO teams may be too close to the company they’re buying (in many cases, a company’s original founder(s) is from the team), but on balance, I think MBOs Are A Good Thing. In particular, the senior management are likely to be much more incentivised (after all, they’re now owners rather than just employees, and will have a stake in the continued success of the firm), and most of the talent stays.
One of the biggest issues in acquisition activity is getting the best people to stay on post-buy out. Usually this involves creating some form of earn-out or tie-in, meaning that the top talent doesn’t just cash in a scoot off. But with MBOs you generally don’t get those kinds of problems, meaning that one of the most valuable commodities in M&A – continuity and stability – are pretty much guaranteed.
One of the more interesting MBO deals of this year has been the buyout – backed by private equity money – by the management team at Oxford company bChannels Limited.
Led by CEO Matt Rowland-Jones, the four-strong bChannels senior management cabal late last month acquired a majority stake in the company following a £5m secondary buyout from RCapital.
The deal, backed by private equity house WestBridge Capital (I think the number of PE houses involving themselves in marcomms buyouts is in itself interesting and is, as my colleague Tony hinted last week, an indication of the confidence investors have in this sector), also includes a significant amount of development capital to enable bChannels to pursue ambitious plans for further growth. This is another interesting thing about MBOs – they tend to be, by their very nature, ambitious and hungry for growth.
bChannels is in the business of channel marketing, and markets itself as “an authority in the provision of outsourced marketing services and customer engagement strategies to global technology companies”. It employs 126 staff at its headquarters in Oxford (close to Europe’s marcomms capital, London) and also has offices in the USA and Australia, so there are useful bridgeheads for future overseas expansion.
bChannels has close relationships with its blue chip customer base, which includes 18 of the top 20 largest global technology companies.
Rowland-Jones set up the company in 1999 with colleague Phil Gowing. He said:
"Although bChannels is already in a very strong position with an enviable portfolio of clients, this transaction provides us with the opportunity to capitalise on further growth opportunities and expand our key client account programme.
"We are the trusted adviser to many global technology customers and the next phase of our development will allow us to continue to enhance our clients' sales growth initiatives. We are particularly pleased to have backing from WestBridge Capital. They have a proven track record in the technology sector and a partnership approach to investment which sees them contributing to the business over and above the provision of investment monies."
Valerie Kendall, a partner at WestBridge Capital, will join the board of bChannels.
"We have been so impressed by the management team at bChannels,” she said in a statement. “They have consistently demonstrated their commitment to their clients, and the respect in which they are held is a testament to their thought leadership in this niche. bChannels is a very highly regarded business and its value will be further enhanced as the team builds on its strategic approach to business development. Working closely together, we've already identified and agreed a number of key strategies for growing the business over the next few years."
bChannels wasn’t the only MBO of last month. MSQ Partners – the seven-strong creative agencies group which includes B2B ad agency Stein IAS and Leeds-based digital shop twentysix – was bought by its management in a £7.8m deal funded by yet another PE firm – in this case NVM Private Equity (in June, NVM also backed the MBO at events agency The Fresh Group, investing £5.7m).
The cash is intended to help grow the business organically and increase its global presence (it already has 15 offices around the world and has around 650 employees). Part of the new growth will be through investment in digital communications – mobile content marketing, social media and data analytics. It’s also targeting growth regions such as Asia Pacific.
Also last month, Manchester-based property marketing agency 90 Degrees Design & Marketing was bought by one of its principals, Jules Shale, with funding by the NatWest bank. Shale aims to now expand beyond his base in the North-West.
Three MBOs in one month – is this the start of a trend?
Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector.