Private Equity Buyouts and Firm Efficiency: Evidence from UK Public to Private Transactions Lloyd Miller A thesis submitted in partial fulfilment of the university’s requirements for the degree of Doctor of Philosophy January 2014 The University of Greenwich Faculty of Business DECLARATION I certify that this work has not been accepted in substance for any degree, and is not concurrently being submitted for any degree other than that of Doctor of Philosophy being studied at the University of Greenwich. I also declare that this work is the result of my own investigations except where otherwise identified by references and that I have not plagiarised the work of others. Signed: Student ____________________________ Date________________________ Supervisor _________________________ Date_________________________ ii ACKNOWLEDGEMENTS First and foremost, I thank my supervisory team Dr Cesario Mateus, Dr Aleksandar Stojanovic, and Mr David Hall for their support and guidance. I would also like to thank Dr Larry Su for his critical help in defining my research questions and identifying my research techniques, and for the many hours spent with me discussing my thesis. Without the help of this supervisory team, completing this thesis would have been more difficult than it already has been. Thank you also to Professor Stephen Thomas, Director of Research, for his support, understanding and critical help in enabling me to address many of the difficult obstacles I encountered during the course of my PhD programme, and in my role of research student representative. My thanks and appreciation also to Dr Denise Hawke for her support and encouragement from the period she assumed the role of programme leader for research and MPhil./PhD programmes and for her support to bring changes to enhance the research student experience in the business school. My gratitude to Gillian Haxell our Research Administrator, whose patience and understanding in sometimes difficult situations I am grateful for. A very special thank you to my partner Debbie, without whom, I could not have done this PhD. Thank you for your love, support and understanding. I would also like to thank my children, Louise, Chloe, Kyle, Louis, and Alexandra for their love and support. I am sorry if I was not always there for you over the last five years when you may have needed me. I promise to spend more time with you all now. During my PhD journey, I have been very fortunate to have had two very good friends at my side throughout. Mahmood Ali and Mustafa Isedu were there when the going got tough with encouragement to continue. Together, we made a formidable team. Thank you for your friendship, support and the many laughs we had. I hope our friendship will continue. I would also like to thank my fellow research students for giving me the honour of serving as their research student representative during my two year term. I would like to thank the ONS and staff, the UK Data Service at the University of Essex for its support in carrying out this research. Finally, I would like to thank Gustavo Sanchez of Stata who has been very helpful in answering my many technical and non-technical Stata questions. iii ABSTRACT This study investigates the impact of 293 public to private buyouts in the UK manufacturing industry during the period 1997-2007 on firms’ technical efficiency using a probabilistically matched buyout dataset. I use data envelopment and stochastic frontier analysis techniques to empirically measure production efficiency, which differs from most previous studies where the impact of financial performance or the movement in a company’s share price is tested. For the sample used and period investigated, no evidence is found that companies involved in public to private buyout ownership changes operate more efficiently than a control sample of PLCs not involved in buyouts. This finding is consistent with the hypothesis that managers of PLCs have learned how to operate their companies in a similar way to those owned by private equity. iv LIST OF ABBREVIATIONS ABI Annual Business Inquiry AIM Alternative Investment Market ARD Annual Respondent Database BVCA British Venture Capital Association CEO Chief Executive Officer DEA Data Envelopment Analysis EU European Union EVCA European Venture Capital Association FSA Financial Services Authority GMB National Union of General and Municipal Workers. GOA United States Government Accounting Office HCSC House of Commons Select Committee IDBR Inter Department Business Register IOSCO International Organisation for Securities Commission IPO Initial Public Offering IUF International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations LBO Leverage Buyout MBI Management Buy-in MBO Management Buyout NIC National Insurance Contributions ONS Office for National Statistics v PAYE Pay As You Earn PLC Public Limited Company PSE Party of European Socialists P-T-P Public to Private SFA Stochastic Frontier Analysis TUC Trade Union Congress. UK United Kingdom US United States of America VAT Value Added Tax WEF World Economic Forum vi DEFINITIONS Buyout and Venture Capital Under the broad term of private equity are two fundamentally different types of investor behaviour (Wood and Wright, 2010). The first, venture capital, involves early stage investors who provide capital in return for input in setting organisational direction. The general consensus is that the effects of this are generally positive (Wood and Wright, 2010, Goergen et al. 2011). In contrast, what is sometimes referred to as private equity per se, is when an investor purchases, or facilitates in the purchase, of a company, or in the premises that either new management, or at least a change in management style may enhance returns. In effect, this involves the purchase of publicly quoted companies and taking them private via so called public to private transactions (Goergen et al. 2011). 1 Buyout In order to be included as a buyout in this study, over 50 per cent of the issued shares of a company must change ownership with either management or a private equity firm or both jointly having a controlling stake upon deal completion (CMBRO). Efficiency A producer is technically efficiency if, and only if, it is impossible to produce more of any output without producing less of some other output, or using more of some inputs (Koopman, 1951, Farrell, 1957). 1 For a more detailed distinction between buyouts and venture capital see Fraser-Sampson, 2007 :7-22. vii TABLE OF CONTENTS DECLARATION ...................................................................................................................................... ii ACKNOWLEDGEMENTS ...................................................................................................................... iii ABSTRACT ....................................................................................................................................... iv LIST OF ABBREVIATIONS ...................................................................................................................... v DEFINITIONS ............................................................................................................................. vii TABLE OF CONTENTS ........................................................................................................................ viii LIST OF FIGURES ................................................................................................................................. xi LIST OF TABLES .................................................................................................................................. xii CHAPTER ONE: INTRODUCTION ...............................................................................................14 1.0 Introduction ......................................................................................................................14 1.1 Research Questions ...........................................................................................................19 1.2 Contributions .....................................................................................................................19 1.3 Organisation of Chapters ..................................................................................................20 CHAPTER TWO: THEORETICAL LITERATURE REVIEW ........................................................................21 2.0 Theoretical Literature Review ...........................................................................................21 2.1 Agency Theory .............................................................................................................. 22 2.1.2 Incentive Realignment Hypothesis ........................................................................... 23 2.1.3 Shareholder and Stakeholder Theory ...................................................................... 27 2.1.4 Debt/Leverage .......................................................................................................... 31 2.1.5 Disciplinary Mergers Theory .................................................................................... 34 2.1.6 Market for Corporate Control Hypothesis ............................................................... 35 CHAPTER THREE: EMPIRICAL LITERATURE REVIEW ..........................................................................39 3.0 Empirical Literature Review ..............................................................................................39