Is a management buyout the answer to Billabong’s woes?

In hundreds of private companies, managers are the owners of the business. But this is different in public companies, where management is typically separate from shareholders, who are represented by the board.

Is the management of companies better when its leadership owns a stake in the company they are running?

It would appear that many private equity investors think so. Taking companies from public to private and giving the management a significant shareholding to make them work harder is a staple of the private equity investment sector.

It could be the answer for the troubled surfwear company, Billabong, which yesterday announced that one of its directors and head of American operations, Paul Naude, has temporarily stood aside from his roles with the company.

Naude will investigate whether he and other managers might buy the troubled company with the help of a private equity investment fund, in a deal known as a management buyout.

Management buyouts don’t always work. Last year, private equity investors wrote off six companies in which they had invested, according to data by AVCAL (Australian Venture Capital and Private Equity Association).

But another 32 were successfully sold to other investors, to rival companies or listed on a stock exchange at a total gross value of $2.2 billion.

Katherine Woodthorpe, the CEO of AVCAL says: “Management buyouts are the bread and butter of private equity fund managers’ investments,” she says. “They occur when there is strong belief that the company is worth more, because it is an unloved subsidiary of parent company, or because they need a strong restructure done out of glare of the public market, or because the management simply feel they could to better.”

Some of Australia’s richest businesspeople, as estimated by BRW magazine, made their fortune from an initial management buyout: Doug Rathbone ($215 million) the CEO of listed agricultural company Nufarm, and Paul Little ($920 million), former chair of Toll Holdings, for example.

In Billabong’s case, however, its founder, Gordon Merchant is blamed by shareholders for the current problems faced by the company. Billabong has already been the subject of due diligence by two private equity firms that have now turned down the investment opportunity. Merchant rejected the first private equity offer early this year at a price that is now well above the current share price.

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