Private equity bids for housebuilders in the 1990s lead to the break up of perfectly good businesses - hopefully this won't be the case in 2007
I was heartened by the decision of Taylor Woodrow’s decision to approve the housebuilder’s £5bn merger with Wimpey this week. Not that I have any problem if Persimmon chooses to pursue its mooted counter bid.
Rather, I’m glad to see that it is not another deal led by an equity house. OK, so in many cases – like the Sir Tom Hunter-led consortium that bought McCarthy & Stone for more than £1bn last year – it seems that the purpose is mainly to acquire a stable income stream.
Having rid itself of its terrible reputation for business management during the 90s downturn, housebuilding is at last being recognised as a strong sector. That’s a good thing. And pretty much all businesses are driven by the profit motive, so why worry about the financial targets that an equity house is likely to set?
Well, it’s quite a new trend, but there is a precedent: the venture capitalists that bought so many, though admittedly small housebuilders, towards the end of the last century. Quite a few of these are no more, as the VCs looked to sell their shareholdings within three-to-five years – when these businesses were arguably not mature enough to stand on their own two feet.
Take Admiral, founded by David Holliday in 1989 with the backing of VC money. The VC, Phildrew Ventures, forced a trade sale in 1996 to make some quick money, having tired of its failure to list the company. Bryant Homes snapped up this fresh, well-regarded business, then broke it up. Within 12 days of the sale, 30% of its staff had gone.
OK, VCs and these equity firms are slightly different beasts, and the circumstances differ greatly. But the problem is, we don’t yet know where these purchases will ultimately lead. People thought bringing in VC money would give them the funds to build great new businesses and ensure them some freedom – hence the number of management buyout teams that pursued VC backing. Ultimately, this was not always the case.
The uncertainty over what will happen worries me – and certainty is what every business desires, after profit of course.