JANUARY 12, 2009

Why a management buyout makes sense at Honda

The suggestion that there could be a management buyout at Honda Racing F1 is a very logical one and probably the easiest solution to Honda's problem. Closing down the team would be a major blow to Honda's image. This, remember, is one of the largest companies in the world and it enjoys a good reputation as behaving in a responsible manner. Closing down the F1 team and putting a large number of people out of work would not be good for Honda.

That route is also costly. Shutting down the team would not only wipe out the investment made, but would also cost in the region of $100m. It would be wiser to spend the same money to support a management buyout headed by Nick Fry and Ross Brawn. At 52 and 54 Fry and Brawn have plenty of time to make a success of the business and both recognise that this is a huge opportunity as the team is basically being given away.

Management buyouts are useful for companies that need to be sold in a hurry. There is no real need for a due diligence process because the buyers know the company intimately and there is no need for any warranties, which is good for the seller. MBOs often occur when a business has been scheduled for closure and the managers want to retain their roles, believing that the company has good potential in the future. They are also used when the management knows that new buyers might bring in new management teams.

The idea of a vendor-funded MBO makes a lot of sense. This means that the purchase of the team could be paid for in the years ahead with money from the profits generated by the company. This would give Honda some return on its investment if the team is able to survive. This could also allow for Honda to have the possibility to buy the team back in the future, which would also help to protect the investment that has been made - and help the top management in Japan justify its actions.

The second option would be to go to private equity investors, who will put up the money to run the team in exchange for shares. Fry and Brawn may well be working on a combination of the two routes - and this may tie in with rumours that Michael Schumacher is talking about an involvement in the team, although he has denied that he has any interest. Schumacher has plenty of money to invest and has great faith in Ross Brawn, the two having worked together for the whole of his F1 career. He may wish to be a silent partner in such a deal as he has never really shown any interest in wanting to become a team principal. This is not necessarily that but rather an investment that could bring big returns. A combination of Honda cash and seed money from Schumacher could launch the new team on its way, giving them time to find more funding later when the global financial situation becomes less daunting. There are risks involved for all concerned but it is a great opportunity.

The primary aim at the moment is to sort out the ownership as quickly as possible and get on with the 2009 programme. A decision is needed very soon on engines and the choice appears to be between Ferrari and Mercedes-Benz. Since the agreements made between the F1 teams and the FIA in December, the F1 engine world has become a buyer's market. The big manufacturers all have large engine departments, but with even tighter freezing of the engine regulations and a ban on testing during the F1 season, there is going to be a lot of excess production capacity at the factories so companies may be actively seeking to extend their engine supply deals to avoid lay-offs.