Dear very successful executive,
You have been working so hard lately, making sure that your company is heading in the right direction, meeting and exceeding your targets, and making sure you distribute healthy dividends to shareholders.
You are probably getting a good base salary, a healthy annual bonus, and some sort of profit sharing. After all, the shareholders want their interests to be aligned with yours as you are a critical pillar for the success of the company. As you are a star in your industry, the shareholders do not want to lose you to the competitors.
But something still seems not right. Are you getting your fair share of the profits? Can you do better financially? Can you grow the business more aggressively? Why can’t the shareholders re-invest the profits instead of taking dividends? Why not get a financial institution to back an aggressive expansion and acquisition plan?
Management buyouts are becoming more common globally and regionally. With a backing of a private equity fund with deep pockets, you may buy your company from your shareholders. You can then go about your ambitious plans with the backing of a shareholder that can speak your language and share your vision. Both of you have their interest aligned and focused on making your company as profitable as possible as quickly as possible. And PE funds don’t lack the ambition: they probably want to triple or quadruple the size of the company over the next few years.
If your shareholders don’t want to sell, how about locating, in your industry, another company to acquire. I am sure you can manage that company as successfully as yours. And the private equity funds will still be interested to partner with you in what they call “management buy-ins”.
Four Seasons, Aramex, Boots-Alliance, Kinder Morgan and others were bought out by their respective management with the backing of private equity funds. The respective CEOs grow their business more aggressively with the backing of the private equity fund, realizing excellent returns for the fund and for them.
But be prepared to put some money where your mouth is, as strategy presentations and business plans alone will not work. The private equity fund will only back those that are willing to risk their own fortunes to make their dream come true.
And be prepared for early retirement after a few years of hard work. The PE firm (and you) will only make money by selling the firm. You will then be rich, but most likely unemployed.
Aramex was taken private by its CEO in 2002 with the backing of a regional private equity firm. In 2005, it was re-listed on Dubai Financial Market tripling the investment for the private equity backer. The CEO and his management team bought 25% of the company and more than quadrupled their money at exit, and they remained on the helm of the company after listing.
Kinder Morgan was bought by a group led by its CEO in 2006, and the CEO automatically made more than $1.8 billion, increasing his stake from 18% to 31% of $15.2 billion company without paying a cent. This was not highway robbery. The deal was done with the consent of Kinder Morgan happy shareholders! Shareholders got the price they want — which was 27% above market price — and the CEO got the company.
Some fresh ideas for a momentous new year’s resolution?
May 2008 be prosperous on all of us.
Imad Ghandour is head of Strategy & Research, Gulf Capital and Board Member of the Gulf Venture Capital Association.
