Louise Scholes

Agency, Strategic Entrepreneurship, and the Performance of Private Equity-Backed Buyouts

Agency theory has focused on buyouts as a governance and control device to increase profitability, organizational efficiency, and limited attention to growth. A strategic entrepreneurship view of buyouts incorporates upside incentives for value creation associated with growth as well as efficiency gains. In this paper, we develop the complementarity between agency theory and strategic entrepreneurship perspectives to examine the performance implications for different types of buyouts. Further, we study how the involvement of private equity (PE) firms is related to the performance of the post–buyout firm. These issues are examined for a sample of 238 PE–backed buyouts in the UK between 1993 and 2003. Implications for theory and practice are suggested.

Family Business Survival and the Role of Boards

We explore the vexing question of whether family firms are more likely to survive than nonfamily firms, focusing on the role of board composition. Utilizing a unique data set of over 700,000 private family and nonfamily firms in the U.K. during 2007–2010, we find that family firms are significantly less likely to fail than nonfamily firms. We identify the board characteristics associated with survival/failure in all firms and determine that it is these characteristics that are important in explaining the lower failure probability of family firms. We conclude with an agenda for further research on boards and family firm survival.

Strategic Changes in Family Firms Post-Management Buyout: Ownership and Governance Issues

When no suitable family successor can be identified, private family firm owners may select a management buyout (MBO) or a management buyin (MBI) exit route. After a private equity backed MBO/I, new owners may select strategies that encourage superior firm performance. We explore the strategic orientation of former private family firms pre- and post-MBO/Is. Ownership and governance issues are considered. Following insights from agency and stewardship theory, several hypotheses are derived and tested with reference to a representative sample of 104 MBO/ Is located across Europe. Univariate analysis suggests greater scope for efficiency gains and growth in cases where the founder was present at time of buyout, where no managers with equity stakes or non-executive directors were employed pre-buyout, and where the private equity investor and management were involved in succession planning. Multinomial logistic regression suggests efficiency gains in firms with no equity holding non-family managers pre-buyout. Conclusions and implications are discussed.

Family firm succession : the management buy-out and buy-in routes.

Purpose – This exploratory study aims to provide fresh insights into the ownership transfer of private family firms through internal management buy‐out (MBO) and external management buy‐in (MBI) succession routes. The paper aims to explore if flows of information impact the succession planning process and if the nature of succession planning impacts the business sale negotiation process relating to family firms that select MBO/MBI succession routes.Design/methodology/approach – Guided by insights from agency theory and theories relating to information asymmetries and negotiation behaviour six hypotheses were derived. Private family firms that had received venture capital and the MBO/I deals had been completed between 1994 and 2003 were identified. A structured survey was administered to 117 senior members of acquiring MBO/I management teams after the deal had been completed in several European countries. Non‐parametric chi‐square tests and Mann‐Whitney “U” tests were used to test the presented hypotheses....

Assessing the impact of private equity on industrial relations in Europe

Private equity firms are accused by trade unions of changing industrial relations in buyouts by demonstrating an unwillingness to recognize and work with trade unions, and by downgrading information and consultation. To explore these important policy issues, this article reports the first representative pan-European survey of managers’ perceptions of the impact of private equity on industrial relations. Managers report that private equity investment does not result in changes to union recognition, membership density or changes in management attitudes to trade union membership. Furthermore, managers in firms recognizing unions after private equity buyouts do not report reductions in the terms and conditions subject to joint regulation. Under private equity ownership more firms report consultative committees, managers regard these as more influential on their decisions, and indicate increased consultation over firm performance and future plans. Comparing industrial relations changes in different social models in Europe, the results suggest private equity firms adapt to national systems and traditional national industrial relations differences persist after buyout.

Family-Firm Buyouts, Private Equity, and Strategic Change

Abstract When no suitable family successor can be identified, private family firm owners may opt for a MBO or MBI. We explore the strategic orientation of former private family firms pre- and post-MBO/I. We utilize a unique hand-collected representative sample of 104 MBO/Is located across Europe. Greater scope for efficiency gains and growth/expansion was found in cases where the founder was present at time of buy-out, where no managers with equity stakes or non-executive directors were employed pre-buy-out and where the private equity investor and management were involved in succession planning.

Public-to-private buy-outs, distress costs and private equity

This article extends previous work by testing the financial distress costs hypothesis in the context of the UK, a contract-based distress resolution system, and by considering the role of private equity firms. Using a hand-collected dataset covering 115 public-to-private buy-outs (PTPs) completed in the period 1998 to 2001 and 115 randomly selected firms that remained public, we find contrasting evidence to that for US PTPs. Consistent with the financial distress costs model, firms going private are more likely to have better asset collateralization, have less debt and be more diversified. However, we also find that UK PTPs are more likely to be younger, experience poor stock market performance and be smaller than firms remaining public. In addition, PTPs did not have lower R&D or higher free cash flows. Our results therefore, indicate that in the UK financial distress costs may not be central to the decision to go private.We also find that private equity providers are more likely to be involved in the process if the firm going private is more diversified, has a higher Q ratio and had been quoted for a shorter period of time and have lower board shareholdings. This suggests that private equity providers are more interested in growth prospects than potential financial distress costs.

The Impact of Private Equity on Management Practices in European Buy‐Outs: Short‐Termism, Anglo‐Saxon, or Host Country Effects?

This article explores the impact of private equity (PE) firms on human resource management practices in buy-outs using data drawn from the first representative pan-European survey into this issue. The findings suggest the overall impact of PE on high-performance work practices (HPWP) is affected more by length of the investment relationship than the countries where PE is going to or is coming from. PE investment results in the increased use of HPWP in buy-outs the longer the anticipated time to exit. With respect to the PE firms’ country of origin, buy-outs backed by Anglo-Saxon PE firms are as likely to introduce new HPWP (and are specifically more likely to extend performance-related pay schemes) as those backed by non-Anglo-Saxon PE firms, suggesting some adaptation to the local host country contexts of buy-outs.

Resources and Innovation in Family Businesses

Family business socio-emotional preferences are often Janus-faced. Some strive to create a strong business they can pass on to offspring by building innovation-promoting resources such as human, relational, and financial capital. Other family firms cater to family desires for unqualified nepotism, altruism towards undeserving kin, and appropriation of firm assets to fulfill parochial desires that erode these resources. This article explores how such preferences, together with their impact on resources and the innovation demands of their markets, shape the approach to innovation.

Resources and Innovation in Family Businesses: The Janus-Face of Socioemotional Preferences:

Family business socio-emotional preferences are often Janus-faced. Some strive to create a strong business they can pass on to offspring by building innovation-promoting resources such as human, relational, and financial capital. Other family firms cater to family desires for unqualified nepotism, altruism towards undeserving kin, and appropriation of firm assets to fulfill parochial desires that erode these resources. This article explores how such preferences, together with their impact on resources and the innovation demands of their markets, shape the approach to innovation.