Post-Privatisation Performance
of Employee Buyouts
Mike Wright
Centre for Management Buy-out Research
United Kingdom
Conference on Privatisation, Emloyment and Employees
Istanbul, October 10-11, 2002
Buy-outs
• Transfer of ownership to a new legal entity
where management & employees are
significant direct shareholders
• Forms:
– Narrow (MBO) or broad insiders (MEBO, EBO)
– Outsiders (MBI)
– Insiders & outsiders (Voucher buy-out; BIMBO)
Buy-outs
• Purchase - financial institution funding &
monitoring
• Give-Away - vouchers (plus some cash)
• Lease of assets with option to buy
• Employee shares:
– Direct purchase
– ESOP
Extent of Buy-outs
• Developed Economies
– Most common in UK (271)
– Germany, France, Austria
• Transition Economies (Large Privatisations)
– Primary privatisation method in 9/22 countries
– Secondary method in 4/22
– widespread for smaller enterprises
• Emerging Economies
– Zambia & Sub-Saharan Africa
Expected Effects
• Developed economies
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Individual ownership incentive
Close monitoring by financing institutions
Commitment to servicing external finance
Performance-contingent rewards
Importance for non-routine tasks
Employees must ‘feel’ like owners
Minimise opportunism, enable entrepreneurial
opportunities
Expected Effects
• Transition economies
– Purchase buy-outs
• Similar incentives & control
• Weakened by undeveloped financial system
• Lack of monitoring skills & hard budgets
– Voucher buy-outs
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Absence of pressures to service finance
Restructuring depends on motivation to hold shares
Insurance & entrenchment
Assets - sell to realise gain, obtain outside funds and
introduce pressure to restructure
• Employees sell if need cash & have little influence
Longevity & Survival
• Objectives of insider, financiers & market
exigencies
– Need for finance for further growth
– Industry restructuring & privatisation
– Need to seek strategic partners
• Employees:
– ESOPs may reduce scope for enterprise to be sold over
heads of employees
– Employees seek to realise significant gains
– In transition management entrenchment may mean
reduction in employee ownership
Attitudes to Ownership &
Involvement
• Most privatisation buy-outs are MEBOs
dominated by management
• Employees:
– little participation in decision-making
– limited perceptions of ownership
Human Resource Factors
• Higher levels of employee ownership in
both developed & transition economies
more likely to be associated with:
– greater employee oriented human resource management
strategies, such as greater communication, annual
appraisals, & higher levels of bonuses
– In transition economies, generally no significant
association between employee ownership & insider
wages
Employment
• Developed economies:
– privatisation buy-outs followed by initial employment
reductions then re-employment
– employment reduction lower in MEBOs
• Transition economies:
– employee ownership does not restrict reduction of
employment
– on balance greater employment falls in MEBOs than in
SOEs but less than in OOs
Productivity & Restructuring
• Impact on productivity depends on
institutional context and policy
• Employee ownership may be more effective
than other forms in some cases
– Most studies show positive effect but those finding
negative effect more robust techniques (selection bias
problem)
– MO more positive than EO
• Restructuring greater where insiders have
purchased shares rather than acquired for
free
Restructuring
• Developed economies depends on context
– Increased cost efficiencies, new products &
restructuring in UK; flexible decisionmaking in Austria
• Transition economies
– Employee-dominated firms less management turnover
– Mixed findings on product & input restructuring
– Insider ownership associated with domestic product
strategies that restrict exports; outsider board presence
important positive effect
– Asset sales and renovations greater in purchase buyouts
than give-aways
Longevity
• Developed economies:
– depends on industrial sector dynamics not buyout mode
– high level of structural change => short life-cycle of
buy-outs
• Transition economies:
– employee ownership reducing as managers/outsiders
purchase employee shares
– mixed evidence of reduction importance of employees
as dominant shareholders, but dominant managers
increasing
– changes greatest in voucher buyouts, least in lease
buyouts
Conclusions
• Build institutional arrangements inside MEBOs to
increase employee involvement
• Access to finance
– Greater financial constraints on voucher buyouts and
purchase buyouts than OO firms
• Mode of sale
– More restructuring in purchase than give-away buyouts
• Longevity of MEBOs highly dependent on:
– Industrial sector
– Management influence on share transferability
• Influence of objectives of employee ownership