The contrasting fortunes of two recently concluded local management buy-outs (MBOs) couldn’t be greater.
Around 100 senior managers at Tilney Investment Management, based in the Royal Liver Building, shared a reported £350m windfall with private equity backer Bridgepoint Capital two weeks ago when Germany’s Deutsche Bank acquired their firm. Tilney’s managers appear to have done well from the deal with some observers arguing that Deutsche Bank paid well over the odds.
It was the second time in a less than a decade that many of the same management team have been the beneficiaries of a big windfall from an MBO. In 1998 around 50 managers at Tilney earned an average of £600,000 when another MBO was sold to US private wealth group Forstmann Leff.
Tilney was founded in Liverpool in the 19th century. It traded in the same guise for many decades until “Big Bang” 20 years ago. Then it was one of a legion of old fashioned stockbroking partnerships that were snapped up by bigger banks seeking to win a slice of the action from the anticipated boom in financial services that deregulation and new electronic trading platforms promised to create.
Alongside a lot of similar deals that saw the old firms swallowed up by banks, Charterhouse acquired Tilney in 1986. The forecast boom became a reality and in many ways continues today. As a result of the buoyancy of the financial services industry, Tilney has changed hands another three times since Big Bang. The firm has thrived on relatively benign conditions in the UK wealth management industry, particularly during most of the 1990s when strong economic growth at home and abroad meant making money was a relatively straightforward business for the wealth management industry.
In contrast to the great success enjoyed by the long established financial services business, software design group FWL Technologies shareholders, including senior managers, got nothing when the assets of their business were sold off in a trade sale last week.
Based 100 yards away from Tilney in another of Liverpool waterfront’s iconic Three Graces, FWL has struggled to make worthwhile returns in recent years.
As a result the firm went into receivership last week as part of a complex arrangement to sell its intellectual property and contracts to rival software groups. It wasn’t meant to be like that. In 2002, when the then chief executive Neil Garland and two other directors acquired FWL Technologies from Fraser Williams Group, the hope was that the business would continue to build on the success it had enjoyed in previous years. During the 1990s, Fraser Williams’ logistics software was one of the more established brands in the global market place. But software is a tricky business. There is a constant requirement for fresh development to stay ahead of the competition and such investment is heavily front loaded with no certain promise of a return.
The industry saw a trend whereby some established customers switched their loyalties to larger rivals such as IBM or Accenture. As a result it proved difficult for FWL to make a profit. A pre-tax loss of £2.8m was recorded in 2004 and £1.1m in the previous year. Debts to the bank and to trade creditors rose considerably from £5.8m in 2003 to £9.1m in 2004. Subsidiaries were sold off to help pay off part of the debt and the management’s private equity investor, RBS Private Equity, called in a turnaround consultant, Paul Griffin in a move that saw Mr Garland and co-owner Malcolm Wright ousted from the board and quitting the MBO without a penny of profit.
With experience in software development in a range of big companies, including Logica, RBS appointed Paul Griffin as FWL’s new chief executive in the hope that he could return the business to its former profitability. Instead, things got worse.
Then last year the group was elbowed out of one of its biggest accounts, which utilised the time of up to 60 staff. But Mr Griffin argues that the biggest blow was the change to pension regulations introduced last year. The new regulations were designed to protect the interests of company staff who are members of under-funded pension schemes. The Pensions Regulator can intervene in the sale of a business requiring any acquirer of a company’s shares to make good any deficit in the related pension scheme’s reserves.
According to Mr Griffin, those new laws, introduced 15 months ago, were the turning point. FWL Technologies had a sizeable pension deficit in its defined benefit scheme, though he wouldn’t reveal the extent of the shortfall.
Mr Griffin said: “When we first became involved it was our plan to turn the business around, put it on a sure footing and sell the shares to either a secondary buyout or to a trade sale. But when the pension regulations were introduced, I realised we wouldn’t be able to do that. The big problem here is the pension deficit.”
Mr Griffin argues that the pensions issue has become so severe that nobody would want to buy a business that has liabilities to a defined benefit scheme. He insists that his efforts and those of his partner had turned the underlying trading position of the business around. He says its good news that the jobs of the staff at FWL Technologies Liverpool office have been secured and that the bank and trade creditors have been paid off. But he says that despite trying there was no way he could sell the business for enough proceeds to cover the pension liability, never mind make a return for the shareholders.
James Dow runs his own corporate finance practice, Dow Schofield Watts, in Warrington, and has worked on numerous corporate transactions. He said there is no sign that defined benefit pension schemes are deterring buyers from acquiring the shares of a business. He said: “Companies do buy companies with defined pension benefit schemes.
“Another reason for this could be that the directors didn’t put enough aside for the pension fund. Liabilities like this don’t accrue overnight.
“Whether or not a company has a pension fund and a deficit is one of the first questions a potential buyer asks these days. But in the end it’s a liability like any other and it can be measured and there are things we can do to insure against it.”
John Newell, an insolvency partner at accountancy firm PKF, said that there is evidence that many private companies have significant deficits.
“They try to do private deals with the Pension Protection Fund. Sometimes the Pension Protection Fund will take a stake in a struggling firm in exchange for helping with a deficit. It’s a better solution than going through the insolvency route. At least this way scheme members can continue to earn an income from employment”.