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Can managers capitalize on economic and political uncertainty?

Study explores key drivers behind an increase in management buyouts
May 25, 2023
By Benjamin Hammer, Sven Mettner, Denis Schweizer and Norbert Wünsche

US coins against black background Photo by Chris Briggs on Unsplash

This research has been funded by a grant from the National Bank Initiative in Entrepreneurship and Family Business.

When the world is in economic and political turmoil, entrepreneurial activities stall and investment behaviour declines. High-stake and long-term financial investments like firm acquisitions are postponed as executives adopt a "wait-and-see" approach in an uncertain business climate.

But a new trend has emerged: management buyouts are on the rise during periods of high economic policy uncertainty.

In a fascinating turn of events, the United Kingdom witnessed a steep rise in management buyout activity, despite the uncertainties surrounding Brexit — Britain’s monumental withdrawal from the European Union in 2017. Management buyout is one of the two primary types of private equity-backed buyouts, where the management team acquires the shares of the organization they oversee. The other – institutional buyouts – refers to a private equity firm purchasing a controlling stake in the company.

Unusual investment outcomes, as seen during Brexit, the rise of European populism, or the 2018 United States-China tariff dispute, provide intrigue for further research. This study, spanning over 18,000 global buyouts, seeks to explore key drivers behind an increase in management buyouts during periods of high economic policy uncertainty.

Why have “inside-firm managers” proven to be successful investors?

1. Lower competition by external fund managers

“Inside-firm managers” have access to important organizational knowledge. This drives the increase in management buyouts in times of high economic policy uncertainty. Under uncertain business conditions, the lack of information discourages external private equity firms from investing; this lowered competition encourages internal managers to time the market effectively and buy out the firm. The results of the study support the authors’ assertion that high economic policy uncertainty can boost entrepreneurial endeavors such as management buyouts as well as provide exit opportunities for selling shareholders when other forms of trade sales may not be available.

2. Reduced financial outlay

With their insight on firm valuation, managers are at a significant advantage of lower financial outlay in terms of enterprise value and earnings before interest, taxes, depreciation, and amortization transaction multiples. This is in contrast with the excessive premiums paid by external acquirers, because of the ambiguity in deal information and firm-specific forecasts.

3. Higher post-management buyout performance

Managers can leverage their informational advantage to target organizations with higher potential of ex ante value creation especially in economically uncertain times when transparency is a challenge for external buyers. Due to concentrations of ownership inherent in management buyouts, organizations have reported significantly higher earnings before interest, taxes, depreciation and amortization growth rates in the holding period following the buyout. This higher level of control allows for managers to maneuver the firm into trajectories of operational success in a volatile industry environment.

Opportunities in uncertainty

Previously studied streams have explored the association between internal manager-led buyouts and variables such as timing and earnings management, innovation, technical efficiency and operating performance of the organization. This study’s findings build on this knowledge by empirically testing specific links between management buyout-related pricing and performance indicators with high economic policy uncertainty during volatile eco-political periods between 1997 and 2016.

This research serves as a much-needed response to the general conception of decreased entrepreneurial activity in times of higher economic policy uncertainty; it proves that it can provide opportunities for investment, while managerial informational advantages can yield favourable buyouts and post-acquisition organizational performance.

Read the original publication:
Hammer, B., Mettner, S., Schweizer, D., & Wünsche, N. (2023). Management buyouts in times of economic policy uncertainty. Finance Research Letters, 52.

Denis Schweizer

Denis Schweizer is a professor in the Department of Finance and director of the Desjardins Centre for Innovation in Business Finance at the John Molson School of Business. 

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