Data and Sample

We benefit from two commercial databases and various internet sources in data collection. A three-step procedure is followed to construct the sample. First, MBO transactions from 2000 to 2009 have been obtained from Thomson One Banker (TOB). Using merger and acquisitions module, our search resulted in 2,607 UK MBOs.7 This list contains information about deal date, deal value, target industry and deal synopsis. To identify our sample companies, we search each company on TOB and drop those that have missing information on PE backing status, past and future acquisitions on company Extel cards, ending up with 601 transactions. For these 601 firms, we collect deal origin and PE sponsor information from deal synopsis. Separately, we obtain the list of secondary buyouts and PTP buyouts from TOB, cross check the samples and drop 46 matching PTP deals and 29 secondary buyouts. This resulted in 526 remaining MBOs. Table 3-1 summarises the data collection steps.

[Table 3-1]

Necessary financial data to examine operating performance is collected from FAME. Buyouts often change their names following completion of the deal. For instance, Thales High Tech Optics changed its name to Qioptiq after a Candover Plc backed MBO in 2005. Many examples like Qioptiq cause difficulty in tracking companies and often lead researchers to exclude a large number of deals from their sample. An advantage of using FAME is that it reports changes in company names, which enables us to track them after buyout. To be

7

The deal coverage of Thomson One Banker is much smaller than that of Centre for Management Buyout Research (CMBOR). According to CMBOR (2010), over 4,000 MBOs have been completed between 2000 and 2009 while Thomson One Banker reports 2,607 MBOs in the same period.

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included in the post-buyout performance sample, we require companies to have at least one year of data –excluding the deal year- after buyout. More generally, we collect data in a (-3, +5) event window which corresponds to maximum 9 calendar years around the deal. In many cases accounting items are inconsistently reported; repetitive figures in several consecutive years are a common characteristic of the data. We discard these years, if not the firms entirely, to ensure consistency of data. At the end, we are forced to drop 114 deals that don’t have data on FAME, leaving a final sample of 412 MBOs. The data is unbalanced panel, e.g. the number of observations is not equal across different years and variables. The number of observations changes for three reasons. First, buyouts originating from divestment of a parent company rarely report separate financial statements in pre-buyout years. More commonly, their performance is absorbed by the parent’s consolidated statements. Second, FAME provides access to accounting data of UK companies in the last 10 accounting years. This leads to a loss of pre-event data for early decade deals. This issue was also reported in Cressy et al. (2007) and Sousa (2010). Third, data attrition is high in the sample. In many cases, accounting items are intermittently reported across years. To illustrate these three issues, we report figures from operating income (EBIT). In our sample of 412 MBOs, EBIT is absent through three pre-buyout years in 119 deals (29%), which could be attributed to data attrition, divisional buyout effect and/or early decade buyout effect. An extreme example of missing data would be the cash flow statement. Cash flow from operations is missing through the entire event window in 217 (53%) of the companies, while EBIT is fully missing in 20 cases (5%) only.

A final issue is survivorship bias that occurs when successful buyouts leave the sample several years after the transaction, potentially causing performance deterioration in remaining buyouts. Buyout firms are often sold to trade buyers or floated on exchange markets several years after the deal. Less often, they fail and end up in receivership. Inclusion of exited

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companies in the analysis after their exit would distort the results. Therefore, we exclude these companies from the analysis in the years following their exit, if the exit occurs during (+1, +5) event window. Researchers must be cautious when interpreting results since their exclusion would leave the sample with buyouts that are unable to organise an exit, which is likely to have a negative impact on the subsequent performance. The survivorship bias is likely to have more effect in longer event windows since most exits in our sample occur in the first four years after the deal. We identify exit status of MBOs, exit dates and routes through PE sponsor websites, www.unquote.com and www.angelnews.co.uk . We also check the exit status via TOB merger and acquisitions, and London Stock Exchange new IPO admissions. Lastly, we collect acquisition data from Extel cards previously downloaded from TOB. A total of 183 exits are identified through these sources. The most popular exit route in our sample is trade sales with 83 MBOs acquired by trade buyers. Secondary (management) buyouts are the second popular route with 69 MBOs sold to another PE investor or to the management. 23 MBOs end up in receivership and finally 8 MBOs are exited by IPO.