Management buy-outs, trade unions and employee ownership

lndustrial Relations Journal ISSN 0019-8692 S3.00

Management buy-outs, trade unions and employee

ownership Mike Wright, Brian Chiplin,

Steve Thompson and Ken Robbie

Management buyouts developed rapidly throughout the 1980s in the UK and continental Europe. The shift to managerial and employee ownership involved, has major implications for trade unions and industrial relations. This article examines these issues using survey and case study evidence from the UK.

In an article published in this Journal in 1984, Wright et al. analysed the industrial relations aspects of the then new phenom- enon of management buy-outs[l]. Since the original survey on which that article was based, the management buy-out market in the UK has continued to grow both in numbers and size of ownership transfers. Moreover, the fortunes of trade unions have also continued to experience dramatic changes.

As may be seen from Table 1, the annual number of buy-outs completed in the UK rose from 238 in 1982 to 373 in 1988 and with the value of transactions increasing in this period from €343 million to some €3717 million. In the first half of 1989, this high level of activity was maintained. Hence, even in real terms, the average size of transaction has risen quite considerably, so that buy-

0 Mike Wright is Professor of Financial Studies and Co-Director of the Centre for Management Buy-out Research, University of Nottingham; Brian Chiplin is Professor of Industrial Economics and Co-Director of CMBOR; Steve Thompson is Senior Lecturer in Business Economics at UMIST and Ken Robbie is Research Fellow at the CMBOR.

outs no longer relate simply to the small firm sector of the economy, but to larger firms with more relevance to trade unions.

From 1985 onwards there has also been rapid development in the UK of the Manage- ment Buy-in (Table l), whereby an external management team using a company established specifically for the purpose and with backing from financial institutions, acquire a firm which may often have been identified as a candidate for restructuring. In some, but not all, cases internal management may become part of the buy-in team. However, the buy-in possibility may have arisen because of perceived weakness in existing management. In 1988 there were 105 management buy-ins in the UK, compared with only 29 in 1985[2], with further growth occurring in the first half of 1989. Estimates suggest that for 1989 as a whole 500 management buy-outs and buy-ins were completed for a total transaction value of €7.5 billion. Management buy-outs and buy-ins now account for over one third of all acquisition activity in the UK.

Management buy-outs are also becoming much more an international form of

136 lndustrial Relations Journal

Table 1: UK management buy-outs and buy-ins

Year No. M E 0 Average No. MBI Average No. Total Average Value Value Value Value Value Value

Em Em Em Em Em Em

1979 18 14 0.8 1 0.5 0.5 19 14.5 1980 36 28 0.8 36 28 1981 145 193 1.3 5 11 2.1 150 204 1982 238 348 1.5 8 316 39.5 246 664 1983 234 364 1.6 8 8 1.1 242 372 1984 238 403 1.7 5 3 0.7 243 406 1985 261 1,141 4.4 29 39 1.3 290 1,180 1986 313 1,188 3.8 48 297 6.1 362 1,485 1987 344 3,220 9.4 89 307 3.5 433 3,257 1988 373 3,717 10.0 105 1,226 11.7 478 4,943 1989Q2 182 1,838 10.1 63 390 6.2 245 2,228

0.8 0.8 1.4 2.7 1.5 1.7 4.1 4.1 8.1

10.3 9.1

Source: CMBOR an Independent Research Centre founded by Spicer & Oppenheim and Barclays Development Capital Ltd at The University of Nottingham

enterprise, with France and the Netherlands of particular importance in continental Europe[3]. Developments in the industrial relations aspects of buy-outs, therefore, may have wider implications than simply the UK context.

Changes in the sources of buy-outs through the 1980’s also suggest developments in the trade union and employee issues which arise (Table 2). From being heavily influenced by the need to save jobs in firms which were either in receivership or were about to be, the sources of buy-outs now display more emphasis on the strategic divestment of non-core activities which are nevertheless basically viable as independent entities. Two other developments are also noteworthy. First, buy-outs occurring on privatisation from state or local authority ownership have now so grown in importance that in 1987 they accounted for around one tenth of this type of ownership transfer (See Table 2). Whilst buy-outs from state enterprises are probably coming to an end, they seem set to increase elsewhere in the public sector most notably due to the implications of the Local Government Act 1988 for the provision of certain kinds of local authority services[4]. Growth in buy-outs may also be expected in parts of the ancillary health services sector. From 1985 onwards, the UK has also witnessed the introduction

of buy-outs of stock market quoted firms in their entirety, although whilst individual cases are quite large they have yet to become as numerically important as they are amongst US buy-outs[5]. Parallel to these developments in buy-outs, trade unions have continued to experience overall declines in their membership, increasing incidence of single-union and no-strike agreements, and the extension of the regulat- ory framework governing their activities. The purpose of this article is twofold. First, it seeks to update the earlier one with the results of a second survey of buy-outs completed between the second half of 1983 and the end of 1985.* Second, it addresses some trade union and employee ownership issues which have become important in more recent buy-outs, Of particular interest is the extent to which ownership has spread beyond a core senior management team to all employees(61 and the industrial relations

* Unlike the earlier survey, which had to rely on financial institutions contacting client companies directly, the later study involved the administration of a mailed questionnaire to all buy-outs completed between mid 1983 and the beginning of 1986 con- tained on the Centre for Management Buy-out Research database. A total of 182 replies were received representing a response rate of 30%. The characteristics of this sample were found to match those of all buy-outs in this period.

Management buy-outs 137

Table 2: Sources of management buy-outs number %

Source

Receivership UK Parent Foreign Parent Family Ownership Privatisation Going Private Total Number

Pre-1982 1982 1983 1984 1985 1986 1987

12.56 14.28 7.04 9.00 2.15 1.73 0.65 59.16 62.76 66.33 63.00 61.37 59.52 51.46 14.14 10.20 11.06 12.50 10.02 13.84 10.68

10.99 8.67 11.06 12.50 21.03 19.38 25.24 3.14 4.08 4.52 2.00 3.00 4.84 10.68 0 0 0 0 0.43 0.69 1.29

100.0 100.0 100.0 100.0 100.0 100.0 100.0 191 196 199 200 233 289 309

1988 1989 Q2 ~ ~~

1.98 0.57 51.85 60.92 9.97 5.17

29.34 27.01 4.84 4.02 1.71 2.30

100.0 100.0 351 174

Total

5.02 58.58 11.11

19.53 4.97 0.79

100.0 2151


issues involved in the growing number of privatisation buy-outs completed in 1987 onwards.

Trends between the two surveys

Distribution of trade unions in buy- outs

In both surveys, a wide distribution of trade unions was evident, reflecting the penetration of buy-outs across industrial sectors. However, some notable changes occur between the two periods covered. Notable reductions were recorded in respect of AUEW, TASS, EETPU, SOGAT and NGA. Few marked increases occur, except UCATT and to a lesser degree the TGWU.

In part, these changes may reflect the shift away from restructuring in traditional engineering sectors facing serious problems, which characterised much of the earlier growth in buy-outs, and the subsequent increase in strategic divestments of non-core businesses including transport and distribution.

Discussions with trade unions

Through both surveys, the buy-outs had been discussed with the unions in only a minority of cases. In the earlier survey 35.6% of firms recognising trade unions discussed the buy-out with them, but this had fallen to 29.5% (31 out of 105 buy-out recognising unions) in the second study. Overwhelm- ingly (8O%), discussions were held with

company level officials, as might be expected given the general size of the buy-outs themselves and the growth in importance of company based union representatives in recent years[7]. This decline may partly reflect the general fall in trade unions’ perceived importance, but may also be related to the move away from buy-outs conducted in ‘crisis’ conditions.

In over four fifths of cases trade unions offered only verbal support for the buy-out, with offers of financial assistance occurring in two cases and recommendations to employees to give financial support also seen in two buy-outs. However, unlike the first survey there was no incidence of declared opposition by the company‘s trade unions. Employees, as distinct from the unions showed a slightly greater willingness to offer financial support.

Derecognition The first survey found that around 65% of bought-out firms had recognised trade unions prior to the transfer of ownership, and that this had fallen to a little under 60% after the buy-out (Table 3). In the second survey, the extent of trade union recognition was considerably less, with 57.7% of buy- outs recognising trade unions under the previous owners and only a little over a half doing so after the buy-out. Both these levels are well below the extent of trade union recognition found in large firms[8].

In both surveys, the largest proportionate loss of recognition was in those buy-outs from receivership, where a complete restart of the firm may be involved. Four out of

138 Industrial Relations journal

Table 3: Trade union recognition ~~

Trade Unions Pre 1983 Survey 1983-1985 Survey Pre MBO Post MBO Pre MBO Post MBO

Y O O!O 070 O/O

Recognised 65.8 58.6 57.7 50.5 Not Recognised 33.3 40.5 39.6 42.9 Not stated 0.9 0.9 2.7 6.6

Base for O h 111 182

Source: CMBOR an Independent Research Centre founded by Spicer & Oppenheim and Barclays Development Capital Ltd at The University of Nottigham

twenty receivership buy-outs in the earlier survey and three out of twelve in the later one ended trade union recognition. For buy- outs on divestment, the comparable figures were five out of 68 in the first survey and nine out of 130 in the second one. The extent of loss of recognition continues to be low and does not show major evidence of widespread and explicit attempts by management to remove trade unions.

This finding also appears consistent with that seen in more general studies, as reviewed recently in this journal[9], which showed that the decline in recognition may be mainly due to the shrinkage of the manu- facturing sector[lO] or to the restructuring which follows takeover[ll]. Whilst recent high levels of takeover activity may provide the conditions for further moves towards derecognition, there remains the countervailing point, found in the earlier study of buy-outs, that management overwhelmingly regard trade unions as an essential means of communicating with the workforce. This point may be important given the increased size of buy-outs noted in the introduction.

Strength of trade union representation

The 1980s have witnessed the development of a trend away from multi-unionism towards single-union deals. This change is reflected in the different incidence of mul- tiple unions between the earlier and the later buy-out surveys. Amongst buy-outs completed up to mid-1983, i t was found that a little under 40% of those with unions

recognised only one. In those buy-outs completed after this date and up to the start of 1986 this figure had increased markedly to over half of the sample (Table 4) despite the increased average size of buy-out between the two periods. Recognition of shop stew- ards and a closed shop before the buy-out is similar in both periods, at over 85% and around 39% of firms recognising unions respectively. However, the second survey shows a decline in recognition of a post buy-out closed shop to 33.7% of firms still recognising a trade union, compared with 40% in the first study.

The low level of industrial disputes observed in the first survey, which may have been influential in obtaining finance, was maintained in the second at a little over 90% not experiencing an industrial dispute in the year prior to the transfer of ownership. A strike had occurred in 4% of buy-outs in the second sample, compared with 2.7% in the earlier study, with over-time bans staying the same at a little over 5% of the sample. Wages declined as a cause of dispute from 8.1% to 6.2% of the sample.

The development over the last twenty years of attempts by management to introduce divisional level bargaining in many large enterprises may be interpreted as a means by which control may be exerted over labour. The spread of combine committees and other forms of cross-plant trade union organisation may be seen as a countervailing response aimed at maintaining comparabili- ties in terms and conditions of employment(l21. Buy-outs may to some extent be considered as a further move by

Munagemen t buy -ou t s 139

Table 4: Mirlti ii~zio~zisvi

Number of Pre 1983 Survey 1983-1986 Survey Unions Number Q/O Number %I

4 or more 4 5.5 7 6.7 3 15 20.5 3 2.9 2 21 28.8 29 27.6 1 29 39.7 55 52.4 Not stated 4 5.5 11 10.4 Total 73 100.0 105 100.0


management to reassert control by extemal- ising, either completely or partially, certain activities. Control may then be exerted by the former parent through a market relationship (where a trading relationship exists) or benefits of continued partial ownership obtained without the problems of direct management. The break from the parent may enable conditions of employment to be renegotiated to reflect the specific market conditions of that entity, which may not have been possible under the central bargaining arrangements of the parent(131. It was noted in the earlier paper that the extent of direct market control may be limited because of the generally low level of trading between buy-out and former parent, and this point appears still to be valid for the later survey[ 141.

Perhaps more relevant is the action of the former managers who buy-out the company and now have the incentive and the ability to make changes. In addition, the close relationship between financing institutions and the buy-out management may reinforce such moves and may indeed be a condition of funding[l5]. Managers may decide to close certain activities and obtain supplies from contractors or from former employees who establish themselves in a self-employed capacity as a means of changing employment conditions. Although there are incidences of this kind of move there is as yet no systematic evidence of its extent(l61.

In principle, action which changes conditions of employment to the detriment of some employees may not be confined to the management buy-out. Even in employee

buy-outs there may be the incentive for original employee shareholders to transfer remuneration from wages to dividends so that new employees can be employed at a lower rate. New employees, if they are able to purchase shares, will usually have to subscribe at a higher rate than original shareholders. But as a result, there may be a crucial positive effect on employment creation[17].

Employment changes The evidence from our two surveys indicates that there has been a marked reduction over time in the proportions of buy-outs shedding labour. In the first survey, 44.1% (49) of firms reduced employment, whereas in the later survey this had fallen to 24.7% (45 firms). This improved position reflects the decline in the proportion of buy-outs occurring from firms either in receivership or in financial difficulties and the increase in buy-outs occurring as strategic divestments of 'non-core' business[l8]. Managers responding to the survey scored 'Fear of Redundancy' as the next to the least most important reason they wished to buy the firm (the least most important reason was 'Fear of new Owner'). The most important reason vendors wished to sell was perceived by managers to be the 'Re-definition of Core Activities of the Group', but lack of profitability was the second main reason. Hence, for some buy-outs major restructuring is a key issue.

In terms of the amount of job losses, the second survey also shows an improved

140 lndustrial Relations lournal

position. In the first survey, 18.1% of prebuy-out jobs were found to have been lost on the transfer of ownership, whereas in the later study only 6.3% of jobs disappeared. The first survey also found, however, that after buy-out there had been some recovery in employment levels, but that this had not reached the levels prevailing prior to the transfer of ownership. At the time of the second survey, total employment was some 4.5% below prebuy-out levels, and 1.9% above the level immediately after buy-out. Increases in post buy-out employment in both surveys are partly due to the effects of the acquisitions that some buy-outs are known to have made. The survey results are also affected by the behaviour of one firm which after buy-out divested a major part of its activities employing some two thousand people. As a result its employment level was almost reduced by half although no job losses were involved. However, thirty two firms in the sample did reduce employment levels some time after the buy-out, mainly as a result of poor profitability and the need to restructure. Interestingly part-time employment, though only about 5% of the full-time level, was higher at the time of the survey than it was prior to the buy-out.

Resistance by trade unions to job losses was even lower in the second survey than in the first. Only two firms in the sample of buy-outs completed between 1983 and 1986 recorded such action, as opposed to eight in the smaller earlier sample.

I t is clear that there is some positive employment effect in buy-outs, but further studies are needed before it is possible to say whether the effect is different from comparable non-buy-outs or greater than in worker cooperatives as some have hypoth- esised[l9].

The spread of employee ownership Management buy-outs introduce the possibility of a much larger percentage holding than can usually be achieved through an employee share ownership scheme introduced into an existing ownership structure. This possibility was in fact little seen in practice at the time of our two surveys. Evidence from the surveys shows that equity ownership remains concentrated in a small group of senior managers. In the survey of buy-outs completed up to mid-1983, only 8% of firms extended equity-holdings

beyond this core team[20], but in the second survey, 14.3% of firms had involved less senior employees directly in share-holding. However, the percentage of total equity held by those other employees taking-up the option to hold shares tends to be low[21], with the core team on average holding a majority of shares. The size of firm bought out will affect the size of management’s equity stake, with other things being equal, the stake being lower the larger is the firm.

Active consideration of an employee buy- out, which involves the opportunity to all employees to purchase equity directly, is low but appears to be increasing slightly (Table 5 ) . There was little interest in estab- lishing a workers’ cooperative. The reasons behind the low level of employee buy-outs relate to the complexity involved (10 respondents in the second survey), a lack of time to prepare the offer (6 respondents), and a lack of institutional support (3 respondents).

Of a little more significance are employee share option schemes. Only 6% of firms in the survey of 1983-1986 buy-outs had an employee share option scheme prior to the change of ownership, but this had increased to 10.4% at the time of the survey with a further 26.9% of the sample expressing their intention to introduce such a scheme. The actual introduction of an employee share option scheme may only occur at the time that the bought-out company is floated on a stock exchange. This move may go some way towards molifying employees when they observe senior managers making substantial capital gains.

Recent developments Since the later of our two surveys was completed, the buy-out market, general economic factors and the environment sur- rounding trade unions have continued to change. In the discussion of the surveys we have alluded to some of the implications of these developments for employees and trade unions involved in buy-outs. Whilst further systematic evidence is not available to quan- tify these effects it seems likely that loss of recognition has not become a major issue and that employment factors have continued to improve, on average, in line with the rest of the economy. What have become more important issues in the late 1980’s are the wider dispersion of employee share ownership and the effects of buy-outs from the


Table 5: Consideration of other buy-out forms with wider ownership

Consideration of Pre 1983 Survey 1983-1986 Survey Number 0% Number %

Employee buy-out 6 5.4 15 8.2 Co-operative 3 2.7 5 2.7

Base for % 111 182


public sector. This section takes each of these aspects in turn, although there is some overlap since wider employee ownership may be a particularly important means of gaining a measure of acceptance of privatisation by unions and employees.

New techniques of spreading employee ownership

The relative absence of wider share ownership in buy-outs completed to the mid- 1980's was noted in the previous section. However, there are reasonable grounds to suggest that this picture is now changing. The development of Employee Share Ownershp Plans (ESOPs) introduced at the time of buy-out may become a more attractive means of providing an ownership stake to all employees and of minimising conflicts between owners and workers. In an ESOP, a Trust is established for the benefit of the employees. The Trust buys shares in the company which is the subject of the buy- out, usually with funds borrowed externally and with the company's shares used as collateral. The borrowings are repaid from voluntary contributions made to the Trust by the company, and as this process continues more shares become available for distribution to individual employees on the basis of some predetermined criteria.

Since employees are not obliged to pay for shares at the time they are acquired by the Trust it is possible for them as a body to acquire more shares than through a con- ventional employee buy-out or than is generally available through a share option scheme[22]. Moreover, as there is no necessity to negotiate with individual employees some

of the complexities which have hitherto hindered the development of employee buy- outs may be avoided. Employees may trade their shares through an internal share market. The ESOP Trust is designed to maintain employee ownership of the company and avoid sale to an unwelcome bidder. How- ever, sale to a third party might occur i f enough employee shareholders vote for such a move.

The ability for employees through an ESOP and subsequent individual holdings to influence the direction of the firm depends upon the proportion of shares they hold and upon the voting arrangements. In general, management and employee shareholdings in a buy-out have been kept separate, with the management stake usually being larger so as to satisfy financing institutions that there is a small group of owners with the incentive to ensure that targets for servicing finance are met[23]. In the event of a vote, for example in response to a hostile bid or to float the company on a stock market, it is by no means clear that all employees would vote to maintain the status quo. Whilst the existence of an ESOP Trust may ensure a block of votes on behalf of employees as a whole, this may still be only a minority share. Moreover, since ESOP trustees have a duty to act in the best interest of employees, they may deem it appropriate to vote for a takeover.

Employee votes may of course be influential, particularly if individual employee skills are important to the success of the firm. In the case of National Freight, the votes of employee shareholders were able to delay management's recommendation for a stock market float until it was possible to introduce

142 Industrial Relations lournal

a means for blocking an unwelcome takeover predator.

However, it is by no means unambigu- ously clear that ESOPs and wider employee ownership is beneficial in all circumstances. This kind of ownership structure may be appropriate in mature firms with predictable profit streams and strong unionisation, so making it possible for the company to support high levels of borrowing and to provide a means of constraining union activity[24]. However, the lack of portfolio diversification that arises from individuals having most of their wealth tied up in the firm for which they work may provoke risk averse behaviour and under-investment. In the extreme this problem may call into question the viability of the enterprise. Whilst wider employee share ownership may help reduce shirking, it could provide a blunt instrument for positively motivating individuals and regarding their performance, which may be a key issue in those firms relying heavily on individual skills.

Imperfect internal share markets also cause problems in that employees wishing to sell their shares may be unable to obtain a full return on their investment. Additionally, over time there may be an increasing concen- tration of shareholdings and an increase in the proportion of non-owner hired workers.

Flotation on a stock market may be a necessary way of raising funds for growth in the more successful employee buy-outs, of increasing a company’s stature in the market-place (with associated long term benefits), and of allowing employees to realise a substantial proportion of their capital gains. To the extent that this occurs, employee ownership is diluted. Hence, within market economies a life-cycle effect may sooner or later be expected to exert itself so that employee buy-outs become only a part of the dynamic structure of enterprise[25].

An interesting aspect of the wider spread of share-holdings has been the perceived need in firms, which rely heavily on large distribution networks, to increase the incentives on branch managers by allowing them equity participation. For example, the 1987 buy-out of MFI-Hygena, the largest buy-out transaction in the UK to date, has extended equity participation through the use of an Employee Share Ownership Plan to branch managers in order to increase motivation and hence performance. Without such incen-

tives, there may be a higher risk of poor performance and hence potential problems in servicing external finance. To date, estimates by CMBOR suggest that there are little more than twenty ESOP Trust schemes in use in buy-outs. The 1989 Budget provided a possible incentive to their development by removing doubt that the Corpor- ation Tax relief to companies on their payments to an ESOP trust would be available provided the appropriate conditions were met, but as yet few transactions have occurred.

Wider share ownership may not necess- arily produce fewer industrial disputes. In many cases, the absolute amount of the large proportionate gains obtained by employees generally from increases in share values may not be significant. As a result, there may be continued pressure for wage increases once an initial ‘honeymoon’ period is over.

Buy-outs on privatisation

As noted in the introduction, since 1985, privatisation has become an important source of buy-outs, especially in 1987 with the break-up of National Bus and extensive divestment by several other state owned firms[26].

The strength of opposition of some trade unions to privatisation is well known. In respect of management buy-outs on privatisation, the opposition was perhaps most forcefully seen in respect of the National Freight buy-out in 1982. However, the National Freight case also showed that the positions of all unions may not be the same[27]. Opposition was most marked from the TGWU, because of that union‘s particularly strong anti-privatisation stance. The differing stances taken by trade union representatives in different localities meant that the initial distribution of shareholdings reflected the relative strength of anti-privatisation feeling across the company’s several hundred depots. As the company pro- gressed post buy-out, scope had to be introduced in the internal share market for those employees who had not originally bought shares to obtain a holding. From an original 37.5 O/O of employees holding shares there had been an increase to over 80% prior to the flotation on the stock market in early 1989.

In the last five years there appears to have been some general modification in trade union attitudes towards privatisation, with


occasional notable exceptions[28]. This change may be a reflection of the declining fortunes of trade unions and may be associated with a preference for the known over the unknown. A buy-out may be less likely to lead to closure in more marginal businesses. Purchasers have been required to give assur- ances about no closures and levels of redun- dancies. Views that incumbent management may take a more relaxed view towards shedding labour and changing remuneration structures may be misplaced where there is pressure to meet financing commitments. Indeed, industrial disputes have occurred in some privatisation buy-outs, for example two of those from British Shipbuilders, because of these issues. On the more positive side, attitudes may be favourable since in some cases employees have seen their relative position eroded as a direct result of being part of a state enterprise and the pressure for firm wide bargaining coupled with constraints on resources. However, being part of a larger private group rather than a buy-out may in some instances provide scope for greater benefits since the former may be less constrained to meeting tight financing commitments than is a buy- out.

Complete information on trade union attitudes to an individual privatisation buy-out is not available since it has not been possible to obtain a full set of responses. We have, for example, been able to interview eighteen of the 39 buy-outs from National Bus[29]. In s ix of these cases, trade unions were considered by management to be against the buy-out and in only four was there a positive attitude to the provision of funds by either the unions or employees. Of course, it is important to bear in mind that trade unions may adopt apparently different public and private stances. In only two cases were employees per se seen to be against the buy- out. If privatisation is seen as inevitable a buy-out may be interpreted as the relatively more attractive of the options available. However, as noted earlier, the ability to obtain sufficient funding may be contingent upon certain changes being achieved.

In the case of Vickers Shipbuilders in 1985, employees voted against the proposed buy- out and the company was subsequently sold to GEC. In respect of the sale of the Doncaster waggon-works of British Rail, now RFS Industries, the NUR took industrial action

on a part of the main rail network in protest at the proposed sale.

A joint bid between employees and another firm may be a means by which incumbent workers can obtain a significant share of the equity even though a full buy- out is ruled out on ground of price or viability and was used in BREL from British Rail in early 1989 and in some of the National Bus sales. Such a move may be an important means of gaining union and employee coop- eration where an outside party is the pre- ferred purchaser.

Buy-outs which involve the privatisation of only a part of a public sector enterprise potentially raise the problem that national level trade union officers may not consider i t significant enough to take-up a position of opposition. Support or otherwise may depend upon the stance of the local officials, who may or may not be fully aware of what a buy-out entails.

The development of employee buy-outs with ownership spread more widely than in a management buy-out may be a means of making privatisation more acceptable from trade union and employee perspectives- though i t cannot be assumed that it will have a positive effect on motivation and hence performance. The involvement from 1987 onwards of Unity Trust in some of these buy-outs (eg Llanelli Radiators, Peoples’ Provincial and Yorkshire Rider) may help reinforce this development. How- ever, the extension of employee ownership to all employees, especially if it means them owning a significant percentage of the equity, may pose difficulties for trade unions since the distinction between employees and owners becomes blurred. For example, in the employee buy-out of Yorkshire Rider in 1988, the TGWU is reported to have taken the view that they did not want their members to obtain such a large per cent of the equity (49%) as i t would undermine the union’s ability to negotiate on their behalf[30];

Buy-outs from state enterprises are increasingly more likely to include an element of wider share ownership than is the case for private sector buy-outs reported earlier, according to the CMBOR database. The smaller earlier buy-outs which occurred on the divestment of the more peripheral parts of state enterprises have tended to be management buy-outs with ownership concentrated in the senior team. In those larger later buy-outs, from 1985 onwards,

144 Industrial Relations l o u r m l

there has tended to be more widespread employee involvement especially where this has been perceived as important to persuade unions to support a buy-out attempt, where employee motivation and commitment has been important in effecting turnround and where the individual skills of employees are important to the success of the buy-out. It is becoming more usual that employees are to be offered the chance to participate in share ownership as a condition of privatisation. However, there are various ways in which this condition may be met even in

The privatisation of National Bus in over seventy separate sales, of which thirty nine were buy-outs, shows a variety of employee involvement, according to information made available by the company at the end of the break-up process. Only five transactions can be classified as having the characteristics of employee buy-outs. The majority of buy- outs (26) involved only a small team of the most senior managers. However, in twelve of these buy-outs between 10% and 40% of the equity was being set aside for purchase in the near future by all employees and a similar number were to introduce a share option and/or a profit share scheme. A further eight buy-outs involved middle as well as senior managers as initial equity holders. Managers and employees in the eight engineering works subject to a management buy-in also had a part of the equity made available to them. These have now all been bought out from the original buy- in team by their incumbent management. Those National Bus subsidiaries sold to third parties fared less well with few obtaining any initial share participation. The extent of competitive bidding for some National Bus subsidiaries and the complexities of organis- ing an employee buy-out as noted already help explain the differences between individual cases.

In the buy-outs from British Shipbuilders, VSEL offered shares to employees at the outset whilst in Vosper Thornycroft employees were only able to obtain an equity stake after the transaction had been completed. In the latter case, the need for management not to be seen to influence employees in order to gain an inside advan- tage against competing bidders was perceived as an important issue.

At the time of writing, there have only been three buy-outs of municipal bus oper-

buy -OU ts.

ators (Yorkshire Rider, Derby City BUS and Grampian Transport), but all have made use of wider employee ownership schemes. There are strong expectations that further buy-outs in this area are likely to use this route in order to meet potential and actual resistance from trade unions and local auth- orities to privatisation. In the case of Derby, a joint trade union bid with an earlier bus buy-out was successful in competition with a management led attempt which offered to use an Employee Share Ownership Trust to speed employee ownership.

Conclusions This paper has sought to extend an earlier study of trade union and employee ownership aspects of management and employee buy-outs in the UK. The evidence from the two surveys generally indicates a low level of loss of trade union recognition and a level of trade union representation and industrial disputes very much in line with industry generally. The results show little change in these respects between the two periods considered.

There are, though, three developments which are worth emphasising. First, the later survey indicated more positive effects on employment than were found in the study of buy-outs completed before 1983. Further research is necessary to establish the extent to which the effects on employment are different from firms in general and whether they are sustained in the longer term. A second development concerns the spread of wider employee equity participation, even though only a minority of cases can be classified as employee buy-outs. It remains to be seen whether the development of ESOPS will enable employee buy-outs to become more significant in the UK although the 1989 Budget was not as helpful in this respect as had been expected.

The third development, which has become more important after the period covered by the surveys, is the use of buy-outs as an option for firms subject to privatisation. At the time of writing, buy-outs appear set to play an important role in the privatisation of local authority services.

References

1. Wright, M., Coyne, J. and Lockley, H. 'Management Buy-outs and Trade Unions:


Dispelling the Myths', Industrial Relations lournal, Vol. 15 No. 3, 1984, pp. 4552.

2. See Chiplin, B., Wright, M. and Robbie, K. Management Buy-outs in 1989-The Annual Review from The Centre for Management Buy- out Research, CMBOR, Nottingham, 1989 for a full analysis of trends.

3. Ibid. 4. Audit Commission, 'Management Ruy-outs:

Public Interest or Private Gain?' Managemenf Papers No. 6, Audit Commission, January 1990.

5. R. S. Thompson, Trends in Management Buy- outs, in B. de Caires and M. Wright (eds.), Management Buy-outs, Euromoney, 1988.

6. See evidence in Wright, M. and Coyne, J. Management Buy-outs, Beckenham, Croom Helm, 1985. For an analysis of the arguments relating to the importance of employee share ownership see eg P. Grout, 'Wider Share Ownership and Economic Performance', Oxford Reuiew of Economic Policy, Vol. 3 No. 4, 1987.

7. See, Marginson, 1'. 'Organisational Form and the Control of Labour', Ch. 8 in R. S. Thompson and M. Wright (eds.), Internal Organisation, Efficiency and Profit, Dedding- ton, Philip Allan, 1988.

8. Ibid. 9. Towers, B. 'Trends and Developments in

Industrial Relations: Derecognising Trade Unions', Industrial Relations lournal, Vol. 19,

10. Milward, N. and Stevens, M. British Workplace Industrial Relations 1980-1984, Cower, 1986.

11. 'New W a v e Union Busting', Labour Research, Labour Research Department, Vol. 77 No. 4, 1988.

12. See summary and evidence in Marginson at reference 8.

13. Frank, R. H. 'Are Workers Paid Their Marginal Products?', Americnn Economic Review, Vol.

14. Wright, M., Chiplin, B., Thompson, S. and Robbie, K. 'Management Buy-outs and Large-Small Firm Relationships', Management lnternatianal Review, Spring 1990.

15. Thompson, S., Wright, M. and Robbie, K. 'Buy-outs, Debt and Efficiency: Some U.K. Evidence', joumul of Applied Corporate Fin- ance, Vol. 2 No. 1, 1989.

16. For example, see the case of Middlesex County Press (now Southnews) in R. Drummond, 'Buy-in Case Study: Southnews', in MBOs, LBOs and Buy-ins, Proceedings of a Conference held 28-29 September 1988, London, Euro- money, 1988.

17. Estrin, S., Grout, P. and Wadhwani, S. 'Profit

No. 3, 1988, pp. 181-185.

74, pp. 549-71, 1984.

Sharing and Employee Share Ownership', Econotnic Policy, April 1987, pp. 13-62.

18. See Wright, M. 'Redrawing the Boundaries of the Firm', Ch.10 in S. Thompson and M. Wright (eds.), Internal Organisation, Efficiency and Profit, Oxford, Philip Allan, 1988.

19. See Grout, P. 'Wider Share Ownership and Economic Performance', Oxford Review of Economic Policy, Vol. 3 No. 4, 1987.

20. Thompson, R. S. and Wright, M. 'Markets to Hierarchies and Back Again: The Implications of Management Buy-outs for Factor Supply', journal of Economic Studies, Vol. 14 No. 3, pp. 5-22, 1987.

21. See Bruce, A., Buck, T., Coyne, J. and Wright, M. 'Incentives for Senior Managers: Share Options and Buy-outs', in M. Poole and G. Jenkins (eds.), N e w Forms of Ownership, Routledge, London, 1990.

22. For a fuller treatment see I*. Brennan, 'Sharing the Family Silver with the Staff', Neru Bridge Street Consultants, 1988.

23. SeeThompson, R. 5. and Wright, M. 'Bonding, Agency Costs and Management Buy-outs', Bulletin of Economic Research, Vol. 41 No. 1,

24. Chen, A. H. and Kensinger, J . W. 'Beyond the Tax Benefits of ESOPs', /ournu/ of Applied Corporate Finance, Vol. 1 No. 1, 1988,

25. For an examination of life-cycle issues see A. Ben-Ner, 'The Life-Cycle of Worker-Owned Firms in Market Economies', journal of Econ- oniic Bchaviour and Organisation, Vol. 10, 1988,

26. For a fuller analysis of buy-outs across the public sector see M. Wright, B. Chiplin and K. Robbie, 'Buy-outs from State Enterprises and Elsewhere in the Public Sector', Public Money nrrd Management, Autumn 1989. See also, Wright, M., Thompson, S. and Robbie, K. 'Privatisation and Employee Buy-outs: Analysis and UK Evidence', Annals of Public and Cooperutizie Economy, Winter 1989.

27. McLachlan, S. NFC-The h i d e Story, MacMil- Ian, 1983, see also Bradley, K. and Niejad, A,, Managing Owners: The National Freight Consorfium, CUP, 1989.

28. See Abromeit, H. 'Privatisation in Great Britain', Annals of Public and Cooperative Economy, pp. 153-179, 1986.

29. For an analysis of the case for buy-outs on the privatisation of National Bus see Mulley, C. and Wright, M. 'Management Buy-outs and the Privatisation of National Bus', FiscaI Studies, Aug. 1986, pp. 1-24.

30. See Soden, J. quoted in 'The Art of Valuing MEBOs', Bits Business 25 Jan. 1989, pp. 10-11.

1989, pp. 69-75.

pp. 67-75.

pp. 287-313.

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Management buy-outs, trade unions and employee ownership