An Empirical Study on the Performances of Management Buyouts in

ORIENT ACADEMIC FORUM
An Empirical Study on the Performances of Management Buyouts in
Chinese Listed Companies
LI Fengyun, GAN Yunyou
School of Finance, Renmin University of China
[email protected]
Abstract The paper analyzes the performances for a sample of 44 management buyouts(MBO) of
Chinese listed companies completed between 1997 and 2007. We find that MBO, in general, has no
significant effect on performances of Chinese listed companies during sample period. After MBO ,these
companies experience increases in EPS. In the fourth years after the buyout, these companies’ net return
on assets, main business profit margin are slightly higher. MBO companies’ growth ability went down in
the second and third year after MBO. In the fourth year after MBO, these companies experience no
change in total assets growth rate, slightly decline in main business growth rate,and substantially decline
in net profit growth rate. But MBO improved operating efficiency to some degree.
Keywords: Management buyouts, Company Performance, Chinese Listed Companies
1
Introduction
Management Buyouts (MBO) is an action that managers buy whole or most of its company shares to
gain the company’s control power.
Many empirical studies on MBO focused on whether MBO can improve companies’ performances.
Jensen&Meckling (1976) argued that MBO can combine the managers’ interest with that of stakeholders,
resulting in decreasing the company’s acting costs. Therefore they concluded that after MBO, share ratio
of managers and their company’s performance are in positive correlation. Kaplan (1989) presented
evidence on changes in operating results for a sample of 76 large management buyouts of public
companies completed between 1980 and 1986, and found that in the three years after buyout, these
companies experience increases in operating income, decreases in capital expenditures, and increases in
net cash flow.
China started MBO at the end of 1990’s.Many empirical studies based on the performances of MBO
compnies’ in Chinese listed companies gave different conclusions or even opposite results.
Li Yuxiang et al (2005) concluded that after MBO, companies’ performances are better than that of
companies which did not carry out MBO.
Mao Daowei et al (2003), Tang Wenxian et al (2004), He Guanghui, Yang Xianyue (2007) Tan Qingmei
(2009) concluded that MBO did not improve companies’ performances.
Yi Zhi (2003) found that the in the year before MBO and the MBO year, companies’ performance had
explicit improvement, but since the year right after MBO, the performances experience the decline
sharply. As a result, he concluded that MBO did not benefit Chinese listed companies. Bin Jiancheng
(2006) found that in the MBO year and the year after MBO, companies had good performances,but
since the second year of MBO, companies have performed badly.
Having refered to all exsisting empirical studies focused on performances of Chinese listed companies
which accomplished MBO, we think that there are three weaknesses, including:
Firstly, study objects limitation. Before 2004, sample size was small and did not have representative.
However, for newly studies such as Hu Jiewu et al’s, their sample included Chinese listed companies
that managers became the second lagest stakeholder after MBO, but it is not a strict defination of
MBO.
Secondly, Most of the existing research on Chinese listed companies post-MBO performance evaluation
only selected the year before MBO MBO year and the year after MBO, a total of three years of data to
study; However, after the buyouts took place, generally there will be 2 to 3 years of integration period.
、
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Obviously, the existing literature in a shorter period investigation on the performance of the company
may draw erroneous conclusions.
Thirdly, they lack of comparative analysis. Most of studies largely fucus on the own performances
change of MBO companies, without considering the possible effects of economic environment, market
environment and industry environment.
Based on the existing research, the paper chooses the sample consists of 44 management buyouts
completed between 1997 and 2007, intending to draw more convincing conclusions based on a large
numbers. Furthermore, the paper selects a matched group and by paired analysis, studies all the financial
data from the year before MBO to the fourth year after MBO (a total of six years). The paper researches
MBO company performance changes pre and post MBO, and then uses ANOVA to study the
performance differences between MBO companies and matched companies to exclude the effects of
capital market and industry environment on the performance of MBO companies
2
Empirical Research on Chinese Listed Company MBO
2.1 Study Objects
The sample consists 44 MBO Chinese listed companies completed from 1997 to 2007. Management
buyouts here are under the most general definition, that is, after MBO, the managers became the largest
shareholder of listed companies. This paper uses companies’ disclosed information of MBO as clues,
combines with the published literature and collectes disclosed information on all MBO companies from
1997 to 2007. All data are derived from the official website of Shanghai Stock Exchange, Shenzhen
Stock Exchange, Resset database.
2.2 Research Methods
This article will examine two aspects of MBO companies’ performance. First of all, we study sample
companies’ performance change pre and post MBO. We choose MBO year to fourth year after MBO,5
years in total. Secondly, we study company performance difference between MBO company and
non-MBO company. In order to avoid market and industry changes’ effects on MBO firm performance,
we elect a matched group for comparative analysis. Matched group selected criteria are as follows:
Chinese listed companies in the same market of study objects;
Chinese listed companies in the same industry and with same main business of study objects;
Chinese listed companies in the same total equity size of study objects;
Chinese listed companies with a similar level of performance of study objects in MBO base year.
In accordance with the above criteria, we select 44 listed companies as matched group.
On this basis, we use ANOVA to compare sample companies with matched group in operating
performance. We determine whether the sample companies and matched group performed differently
during same periods to evaluate MBO’s influence on company performance.
We give a set of assumptions for each performance indicators (such as earnings per share):
Null hypothesis H0: µ1 = µ2, mean of MBO company X index is equal to mean of matching company X
index.
Alternative hypothesis H1: µ1 ≠ µ2, mean of MBO company X index is not equal to mean of matching
company X index.
Then, construct F statistic to conduct mean test on the sample companies’ and matching companies's X
index, if F <F crit or P-value> Pα = 0.05, the null hypothesis is accepted; On the other hand, reject the
null hypothesis.
2.3 The Choice of Performance Indicators
In research on MBO company performance, how to measure the company's performance indicators is a
core issue. There are many indicators to measure the performance of listed companies, including
profitability indicators , growth indicators, operating efficiency indicators and solvency indicators.
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Existing literature on corporate performance indicators mostly used four categories 12 indicators, we use
the same performance evaluation. Considering Earning per Share(EPS) is a important indicator of
corporate profitability, we add EPS. Check in Table 1.
Table 1 Performance Evaluation Indicators
Index Type
Index name
Formula
Profitability
indicators
Earnings per share
OPE
ROE
Total assets profit margin
Net asset growth rate
Net profit growth rate
Main business revenue
growth rate
Accounts
receivable
turnover ratio
Inventory Turnover
Total assets turnover
Current Ratio
Quick Ratio
Asset-liability ratio
Net income / Total equity
Operating Profit / main business income
Net income / average net assets
Net income / total assets
Report of the net asset / net asset base -1
Report of net profit / net profit base -1
Report of main business revenue / base of the main
business income -1
Product sales revenue / average accounts receivable
balance
Cost of sales / average total inventory
Sales revenue / average total assets
End of current assets / current liabilities at end
End liquid assets / current liabilities at end
Final Total liabilities / total assets end of period
Growth
indicators
Efficiency
indicators
Solvency
indicators
2.4 Sample statistics description
2.4.1Profitability Analysis
There is no significant change in the arithmetic mean of EPS from the year before MBO to the fourth
year after MBO (6 years in total) EPS. There is a significant reduction in the fourth year after MBO in
EPS. However, there is increasing trend of standard deviation, showing that 44 sample companies’
individual differences increase; Interestingly, the matched companies’ earnings per share also declined
in the fourth year after MBO. This may be result of market factors impact.
In terms of rate of return on net assets, MBO companies in the previous year of buyout has arithmetic
average of -2.69%, which then became 4.4% in the year MBO, indicating that there is a clear
improvement in the short term. In the second year after buyout arithmetic average of ROE showed a
decline, followed by the third year, while in the fourth year it went up. But, for matched group, ROE
kept stable and was higher that that of sample companies. In the fourth year after MBO, companies’
ROE was 6.08%, slightly higher than the 4.61% of matched company. This shows that after MBO,
companies experienced integration, and the owner earnings were improved.
To the main business profit margins, the arithmetic average remained stable, and was in the same level
with the matching company.
2.4.2 Growth Ability Analysis
For growth capability, the 44 sample companies’ total assets growth rate declined obviously in the
second year after MBO. The corresponding ratio of the matching companies is in decline one year after
MBO. To the fourth year after the buyout, the two appeared to a similar level.
Viewed from the main business growth, the sample in the third year after MBO showed a significant
decline, while the ratio of matching companies was in a slight decline. To the fourth year after MBO, the
two were both resumed their upward momentum, but compared to matching companies, MBO
companies did not have any advantages.
Average net profit growth of MBO companies in the second or third year showed a decline. The average
in the third year after the merger was -7.66%, while there was a recovery in the fourth year, though still
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substantially lower than that of matching company; Matching companies’ growth rate fluctuated in the
corresponding period, but the overall trend was upward obviously.
2.4.3Operating Efficiency Analysis
In terms of the total asset turnover rate, to MBO companies, there was little difference in before and
after MBO. The mean range in this six year period was 0.58-0.68, while the corresponding mean range
of matching company was 0.47-0.61. MBO companies’ total asset turnover rate is better than that of
matching companies.
Viewed from the inventory turnover rate, to MBO companies, the mean range in this six year period was
4.73-5.73, while the corresponding mean range of matching company was 2.96-4.45. MBO companies’
inventory turnover rate is better than that of matching companies too.
Accounts receivable turnover in the MBO year got much improvement. To MBO companies, the mean
range in this six year period was 10.51-12.96, while the corresponding mean range of matching
company was 9.63-12.85. Accounts receivable turnover of MBO companies is also slightly better.
From these three indicators, the means of MBO companies were higher than that of matching companies,
showing that MBO companies’ operating efficiency is higher than that of matching company.
2.4.4Solvency Analysis
In terms of the asset-liability ratio, MBO companies’ average debt rate has increased year after year,
from 43.35% in the previous year of MBO to 67.19% in the fourth year after MBO, and difference in the
sample group was also gradually increasing. The corresponding ratio of matching companies was also
increasing. In the fourth year after buyout, the ratio was 62.51%. But whether from mean or from
median, the ratio of MBO companies is higher than that of matching company, showing that MBO
companies’ long-term debt increased while its long-term solvency weakened.
Viewed from the flow ratio in the six years-period, MBO companies’ flow ratio declined from the
previous year's 2.05, to 1.72,1.44,1.38,1.41, until 1.13 in the fourth year after MBO. It is an obvious
downward trend. However, the corresponding Ratio matching company had no downward trend at all.
Its average value was between 1.58 and 1.93. Both mean and median of MBO companies’ flow ratio is
less than that of matching companies.
For MBO companies, the liquid ratio in six-year period were 1.26,1.29,1.02,0.92,0.84 and 0.74,
decreasing year by year. While the corresponding ratio of matching companies were
1.41,1.27,1.25,1.03,1.05 and 1.19. The downward trend was not obvious.
Either flow ratio or liquid ratio declined after the buyout and were lower than that of matching
companies, showing that short-term liquidity management got worse after the buyout.
2.5 Differences test
To compare the performances of both MBO companies and matching companies, we used ANOVA
methods to analyze corporate performance indicators comparablely. Aiming at the 13 indicators, we
analyze all the financial data of MBO companies and matching companies in the six-year period to
determine whether the sample companies and matched group performed differently during same periods.
We propose a set of assumptions for each of the 13 indicators:
Null hypothesis H0: µ1 = µ2, mean of MBO company X index is equal to mean of matching company X
index.
Alternative hypothesis H1: µ1 ≠ µ2, mean of MBO company X index is not equal to mean of matching
company X index.
Then we start F test.
From Table 2, in the specific indicators of MBO companies’ profitability, operating efficiency, growth
ability and the assets and liabilities rate of solvency ANOVA, F statistics is smaller than Fcrit, given α
level the critical value and P-value test P> 0.05, so we accept the null hypothesis that there is no
significant difference between MBO company and matching company in profitability, operating
efficiency, growth capacity and solvency’s rate of assets and liabilities are not differences, indicating
that MBO has no significant effect on Chinese listed company.
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Index Type
Profitability
index
Growth
targets
Efficiency
indicators
Solvency
indicators
Index name
Earnings per share
Table 2 "ANOVA" Conclusions Summary
df
in
total
F
P-value
（
）
F crit
conclusions
425
0.577754
0.447616
3.86348359
accepted
ROE
415
1.401377
0.237172
3.86401791
accepted
OPE
424
0.489535
0.484519
3.86353588
Total assets profit margin
425
0.092864
0.760716
3.86348359
accepted
accepted
Total assets turnover
424
3.733958
0.053984
3.86353588
accepted
Accounts
receivable
turnover ratio
Inventory Turnover
425
0.118896
0.730406
3.86348359
423
3.583778
0.05903
3.86358842
accepted
accepted
Net asset growth
425
0.444639
0.505254
3.86348359
accepted
Main business revenue
growth
Net profit growth rate
425
0.857486
0.35497
3.86348359
425
1.373786
0.241821
3.86348359
accepted
accepted
Asset-liability ratio
425
0.895271
0.344592
3.86348359
accepted
Current Ratio
425
425
8.123842
4.530955
0.004582
0.033863
3.86348359
3.86348359
rejected
Quick Ratio
rejected
df: degrees of freedom, F: test statistic; P-value: test P value, F crit: given the critical value α level, α = 0.05
However, in the current ratio and quick ratio of solvency ANOVA, F statistics is bigger than Fcrit, given
α level the critical value and P-value test P<0.05. Therefore, we reject the null hypothesis, that means
there is significant difference between MBO companies and matching companies in current ratio and
quick ratio, indicating that MBO has a significant effects on the short-term solvency of Chinese listed
companies.
3
Conclusion
From the empirical results, in general, MBO has no significant effect on performances of Chinese listed
companies. However, compared with previous studies, this paper shows the following unique features of
Chinese MBO companies:
From the profitability point of view, MBO companies compared with matching companies have no
significant improvement, but EPS is higher; in the fourth year after buyout, MBO companies’ net return
on assets, main business profit margin are slightly higher than the matching companies.
Viewed from the growth ability, in the second and third year after MBO, MBO companies’ growth
ability went down, which may be caused by integration after MBO. To the fourth year after MBO , total
assets growth rate showed a similar level with the matching company, while the main business growth
rate was slightly lower than that of matching companies. Only net profit growth rate was substantially
lower than that of matching companies.
Management buyouts of listed companies improved operating efficiency to some degree. MBO
companies’ operating efficiency is higher than that of matching company, showing that MBO improves
the company's operating efficiency.
Management buyouts of listed companies have a significant effect on the short-term liquidity. Possible
reasons are that MBO company has a preference of paying out cash dividends (Li Kang et al, 2003; Li
Yao, 2008). Under this behavior, the companies have to increase debt to meet their operational needs.
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