A better bid for Bitronic – a Management Buy-Out case study
Bitronic CEO Peter Weilmuenster knew that he was not facing a zero-sum game – maximum value for parent company EMTS’ creditor did not have to come at the expense of the future of Bitronic, its employees and his own career. In the upcoming CeBIT technology fair, he had a lever with which to build a compelling case for an expeditious decision in favour of a management buyout, which would fulfil both the court’s and his objectives.
As competitors, one could theoretically see that Teleplan and A Novo would be willing to pay the highest price. Associated profit-increasing synergies could be achieved by realising economies of scale, rationalising cost centres, and by increasing revenues by marketing dissimilar products and services to one anothers’ customers bases. For Weilmuenster, a take-over by competitors would mean that his and his colleagues’ jobs would likely come into the cost-cutting- “synergy achieving” equation. Such an arrangement, therefore would not in his interest. The best way to persuade the court that this would also not be in the Bank of Austria’s best interest as creditor would be to argue that banking on the sincerity of competitors as serious bidders would be an unwise gamble.
Prolonged negotiations and due diligence with either of Teleplan and A Nova were likely to be a ploy, Weilmuenster could argue to the court, to prevent Bitronic coming to the CeBIT fair with a clear perspective on ownership. Without certainty as to Bitronic’s future, customers would likely switch to one of its competitors, Bitronic’s sales and profitability would decline and so would its value when selling to a serious bidder. To strengthen this argument against a competitor buy-out, Weilmuenster could mention that rumours had already started circulating that Bitronic was approaching bankruptcy, and that it didn’t take a large stretch of the imagination to figure out who would have an incentive to start such rumours.
Finally, he could argue that had A Nova and Teleplan been serious bidders, they would have bought Bitronic when it was offered for sale in 2003, although this would have been an argument open to much criticism (the sales process was poorly organised, Bitronic was not being sold at a “bankruptcy discount” at the time, the competitors may not have had the cash to buy Bitronic at that time).
A takeover by a “friendly” competitor could have been more attractive to Weilmuenster, except that there would be uncertainty as to how friendly the competitor would be, and whether that would translate to foregoing cost-savings through redundancies. It if it did, it could possibly be less attractive to the court, because the competitor would pay less of a premium than an unfriendly competitor. In any event, Weilmuenster would lose managerial control. Had the friendly competitor had the cash to make a serious buy-out bid, Weilmuenster could have argued to the court that RTS’ credentials as a “friendly” bidder were in question, and as such, its incentives for making delays in the due diligence process should be viewed as the same as Teleplan or A Nova.
From the court’s perspective, all else being equal, the PE fund’s bid would have been less attractive than a competitor’s because it would not have had synergies to benefit from, although this could have partially been off-set by its deeper pockets, its lack of expertise in valuing a company in Bitronic’s industry and the value that it would place in buying Bitronic with its management team, if the PE fund realised, like Axel Hirschberg (the court’s representative charged with deciding who should buy Bitronic), that Weilmuenster and his team constituted one of the core assets of Bitronic. On a personal front, Weilmuenster would have therefore preferred a private equity investor to the sale to a competitor, knowing that a management buy-in would be unlikely. But without prior expertise of Bitronic’s industry, the due diligence process would take the longest amount of time in the case that all bidders were sincere, and likely longer than the time left to the technology fair. The PE fund would therefore not be a suitable bidder for Bitronic, Weilmuenster or for the court for the same reason that competitors would not have been.
This brings us to the final option: the one Weilmuenster would have favoured the most because of the autonomy it would have afforded him in running his company and his future. With only one shareholder needing to conduct due diligence in a collaborative partnership with the existing management, a management buy-out offered the only likely opportunity to broker a deal before the critical technology fair.
In aligning Bitronic’s management’s interests with the new shareholders’ interests, the management-buyout would have had a secondary positive effect on Bitronic’s bottom-line, and would increase its value. The parenting effect of the new shareholder, a serial entrepreneur with experience in branding and launching new offerings, would also add positively to Bitronic’s value.
Together with the fact that the chances of getting “fair” value for a company that failed to sell just months earlier and was now being sold at a “bankruptcy discount” were diminished, and that secondary and extrinsic levers could generate extra value in the case of a management-buyout, a management buy-out, would have been, Weilmuenster would have successfully argued, the most attractive option for the court to pursue.
This was a response to the INSEAD Case Study “EMTS” by Peter B. Zaboji and Oliver Gottschalg, 2005, for Professor Oliver Gottschalg’s Management Buyouts class taught at HEC Paris