Scotland 2014 – Time for a Management Buy-Out?

| 17/06/2013 | 6 Comments
Ivan McKee Manufacturing Investor

Ivan McKee Manufacturing Investor

A Management Buy-Out (MBO) occurs when the management of a business (often a division of a large corporation) sees the opportunity to run the business more profitably with localised decision making, buys the business from its corporate owners, and seeks to get better results and grow.  

It’s a fairly common business restructuring process which often results in a new lease of life and bright future for the business in question. MBOs have the highest success rate of any business restructuring process.

When local managers can see how to grow the business but distant, detached and often uninterested decision makers in the far away HQ are holding the company back, it is time for an  MBO.

Scotland is being held back by distant, detached and often uninterested decision makers in Westminster, decision makers who don’t understand (or don’t want to understand) Scotland’s distinct economic and business policy needs. Scotland then, in business speak, is ready for an MBO, Scotland offers a tremendous opportunity for the people of Scotland to take responsibility for the running of the country to actually benefit of the people of Scotland – a novel concept?

The MBO process is one I have some familiarity with: analysing businesses and making decisions on how best to structure them. In other words, how best should Scotland, as a division of UK plc, go about maximising the value it could deliver to its stakeholders (you and me)?

When looking at a business opportunity it makes sense to focus on the numbers and leave out any emotional attachment. When you mix business with emotion neither fares well, having lived and worked in a dozen countries my outlook couldn’t be described just as nationalist, more internationalist.

Look at the numbers

The first aspect to consider is whether Scotland would be better or worse off in profit/loss terms than it currently is as part of UK plc

The numbers show that Scotland contributes a significantly higher % of revenue to the UK than it receives in spending. This is a consistent pattern over a number of years.

Those spending figures are also inflated as they include many ‘central’ (or ‘head-office’ costs if you like) which are ‘allocated’ across the UK on a population basis – although a high proportion of that spending doesn’t actually take place in Scotland. Anyone who has been responsible for running a division of a large corporation understands the questionable value for money of head office cost allocations.

One example is defence – where only around 60% of the notional £3.3bn considered to be spent ‘on’ Scotland’s behalf is actually spent ‘in’ Scotland.

Another is Debt Interest repayment. Scotland’s P&L is currently saddled with a £4.1bn population share of the UKs debt interest payments. This despite the fact that Scotland’s deficit represents only 5% of its GDP (compared to the UK’s 7.9%). Were Scotland to borrow on its own account its likely lower interest payments would give a further boost to the national Profit and Loss account.

Scotland’s £50m share of the cost of Westminster MPs (and their expenses) and the additional £10m we pay for the House of Lords is another. The opportunity to remove such an unnecessary and expensive layer of bureaucracy should excite anyone familiar with LEAN manufacturing concepts.

In the good years Scotland has benefited from a current account surplus, when the UK has still been in deficit. During the low points of the economic cycle Scotland has as currently a lower % deficit than that afflicting the UK as a whole.

Scotland’s GDP per head (or revenue per employee in business terms) is also significantly (about 15%) higher than the UK average.

Our size isn’t a problem

The next issue to consider is whether Scotland, as an independent business would be big enough to survive in an ‘open market’. In international terms Scotland is actually an average sized country and not actually that small, population wise.

An Independent Scotland would have a GDP of around £150bn, which would put it in the top quartile of countries in the world by GDP in absolute terms – so no economic lightweight.

When compared to similar, and very successful, ‘businesses’ in the same market the evidence shows that smaller entities tend to do better. Of the 20 richest countries in the world (GDP per capita) almost all have populations smaller or similar to Scotland’s.

It should come as no surprise that Norway, Denmark, Switzerland, Sweden, Singapore, Austria, Finland etc do well. In the 21st century economies (like companies) are rewarded for being flexible, responsive and for having the ability to spot and exploit opportunities. Small businesses often suffer from an over-reliance on one customer or product. So how would Scotland fare in this regard?

Scotland’s energy

Scotland’s offshore energy sector accounts for about 15 – 20% of its economy. It’s a large share, but not uncomfortably so. A business with 20% of its sales to one customer would not normally be overly concerned about that state of affairs

Other ‘product lines’ are also strong, including Food and Drink, tourism, life sciences, creative industries and some key niche manufacturing sectors.

It is also good for an MBO to be able to identify future business opportunities it is well positioned to exploit. There are tremendous potential future market opportunities and revenue streams from a growing market segment of the future– renewables. Scotland comprises 25% of the EU’s wind and wave energy reserves.

Access to good credit terms is often a critical factor for the success of an MBO.

Lenders like security.

A physical asset, like oil, which is globally tradable and fixed in location, is a great basis to borrow against.

Any MBO which begins life with such a dowry is going to be in an excellent position to deal with inevitable ups and downs in the trading environment. Much more so that its parent Corporation which has as its main revenue generator the highly transportable, highly variable commodity that is global financial services.

Having been involved myself in a couple of successful MBOs of Division from large corporations, the comparison to an MBO that business people such as Jim McColl and others have been making stuck a chord. The ability of local management and employees to focus on what’s important for the business, to set a strategy that isn’t constrained by corporate policy designed to favour larger divisions with very different business models, to be able to remove layers of unnecessary bureaucracy and decision making really can allow a business that was previously being held back to thrive and that is exactly what is likely to happen to Scotland if it is run by and for the people of Scotland.

Conclusion

Since 1963, UK GDP has on average grown by 2.5% a year, but only by 2% in Scotland, due to policies of de-industrialisation, and lack of investment and now austerity from Westminster. If Scotland’s growth had kept pace with the UK, its economy would be 25% larger today!

In the case of Scotland, local management and economic decision making can allow a strong economy to grow and improve by casting off the old fashioned and restrictive Westminster millstone that hangs around the neck of our economy and make Scotland a better place to live, work, do business and generally succeed as a people.

Further Reading:

Scotland’s finances ‘stronger than UK’ – Scottish Government

Scotland’s GDP per head is higher than UK average – SNP

Join Business for Scotland, – Read More

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Category: Business Policy, Economic Strengths, Economics of Independence, Entrepreneurship, International

About the Author ()

International businessman Ivan McKee has worked in manufacturing for 30 years; he currently has interests in manufacturing businesses in Scotland, England and Eastern Europe and runs his own manufacturing turnaround and consultancy company. His work has taken him across the globe, including periods working in Scandinavia and Eastern Europe. “All the financial data clearly shows that Scotland as a stand-alone economy would be more prosperous than at present. The primary focus of the UK economy is the City of London and the banking sector, manufacturing as a consequence is often overlooked. My global experience has shown me how dynamic, responsive and successful smaller countries can be, when given the scope to focus on what is important for their economies and businesses”.

Comments (6)

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  1. Laurie Clark says:

    Great well written .I must think up more analogies and we must do more lunches in Edinburgh .I hope you don’t mind me using this a well ?

  2. john corbett says:

    Ivan

    thank you

    good plan. can I use it in discussions?

    john

  3. Ivan McKee says:

    Jim, Thanks for the comment.

    I would agree that Scotland should move to renewables as quickly as possible.

    With 25% of the EUs renewables potential (Wave and Wind) there is great scope for Scotland to become a leader in that field – not only utilising the resource but also developing the technology and enabling local manufacturing to support that industry.

    To do that effectively requires government support that recognises this as a priority field for investment, and I think that support is most likely to come from Edinburgh than London.

    Regarding future Oil reserves and whether they can be used or not,in the long term I think you are right, but this will be demand led rather than supply led. In other words oil consuming nations will be driven (excuse the pun) to meet renewables targets which will eventually lead to reductions in demand for oil.

    I think that is a long way off.

    I dont think the worlds other major oil producing nations (US, Russia, Saudi, Iran, Iraq, Venezuela, Norway) are about to start voluntary reductions in oil production, and I think the same dynamic would apply to Scotland.

    The answer in the long term is to use some of the oil wealth to create an oil fund (as Norway has done and the UK has not) to invest in future renewables technology development.

    That is an option which is only available I think under Independence.

  4. Jim Osborne says:

    I think care has to be taken over assuming Scotlands oil is an asset that can be borrowed against…it is soon likely to become a “stranded asset” as most of it will have to be left in the ground if our commitment to keeping global warming within +2C is to be kept. The known global oil reserves are 5x the volume that can be burned in order to keep within 2 degrees warming. It will soon have zero value. Scotland needs another strategy. If we have 40 years of reserves we can only extract 8 years…the strategy needs to recognise the scale of the conversion to renewables that is required and the short timescale for achieving it. It can be done but new thinking is needed. New thinking may be a better asset to borrow against than the oil will ever be.

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