Boom for the MBO market

The management buyout market has boomed this year despite a significant drop in mergers and acquisitions. Figures from the Centre for Management Buy-Out Research (CMBOR) show that in the first half of the year, the value of buyouts was £13.5bn, up 56 per cent compared to the similar period last year.

Yet in that time mergers and acquisitions have dropped by nearly three-quarters. This means that,k for the first time, the value of management buyouts is more than the M&A market, according to CMBOR.

The reduction in the number of companies who want to expand by acquisition means private equity firms have less competition in the deals they do, so they can get better prices. Tom Lamb, managing director of Barclays Private Equity, said: "With most potential trade buyers increasingly distracted by their trading difficulties the private equity houses are well-placed to go bargain-hunting."

BT, which has had more than its fair share of troubles, did the biggest deal this year with the £2bn sale of Yell, the directories firm. But the technology sector has had a drop in buyout activity. Other deals were Delancey Estates, sold to its management for £264m, and Whitbread's pubs, which went for £1.6bn.

One particularly good source of deals has been the receivers. Eleven per cent of deals in the first half were from companies that had gone into receivership.

But nearly half of the exits by private equity firm from their investments is caused by that investment going into receivership. Overall, exits are down because of the reduced number of new floats on the stockmarket and trade buyers being unwilling to buy up companies.

"What's of concern is how companies are performing in the portfolio," said Mr Lamb. "If you have problems it reduces return and also sucks up executive time."

While private equity firms can pick up bargains at this time, the fall in M&A activity has hit investment banks hard. Merrill Lynch recently issued a profits warning and many have reported poorer results than last year.

The CMBOR research was sponsored by Barclays Private Equity and Deloitte & Touche, the accounting firm.