Workers will not only be worse off when their firm is taken over by private equity through an institutional buyout (IBO), but their company’s performance will fall behind its rivals. New research has discovered that IBOs - defined as a highly leveraged transaction where one or more institutional investors act together to initiate a buyout deal - result in staff losses and a decrease in overall productivity.
Geoffrey Wood, Professor of International Business at Warwick Business School, said: “Our findings suggest IBOs and their impact on managerial practices do not appear to be an effective mechanism for turning round failing firms.
“I would argue, far from the notion they revitalise the acquired organisation and unlock dormant capabilities and value, our research suggests more often than not the opposite occurs.
“Our core finding shows a significant loss in employment in firms subject to an IBO immediately following the takeover. What’s more, wages tend to fall well below the market rate.
“Perhaps this could be partly excused from a business perspective if there was an increase in productivity and profitability, but we found even in that regard there was no evidence to suggest such improvements subsequent to the takeover.”
In the paper The employment consequences of private equity acquisitions: The case of institutional buy outs Professor Wood, Marc Goergen, of Cardiff Business School, and Noel O’Sullivan, of Loughborough University’s School of Business and Economics, examined changes to employee numbers, employee productivity and employee remuneration as well as profitability over an 11-year window for 106 IBOs.
They looked at IBOs undertaken in the UK between 1997 and 2006, investigating the monitored firms’ performance and employment and wage figures six years before takeover through to four years afterwards. They compared these organisations, against a group of firms with similar performance and another group from the same industry.
The IBO companies’ median employment growth was 11 per cent five years before acquisition, falling down to 4.8 per cent the year after the deal.
Figures on salary suggest a similar trend with companies seeing a salary reduction from a mean of £29,460 before the IBO to £28,520 following it. By contrast in that same period industry and sized matched companies saw the mean salary surge from £30,170 to £38,430 while performance matched companies saw their mean salary rise from £30,890 to £33,810. Four years after the IBO the mean salary was at £34,010, while in the control firms it was at £44,210 and £42,860 respectively, suggesting the mean workers’ salary at the IBO companies was as much as £10,000 less.
The research also highlighted productivity, measured in the research by calculating real turnover over employees, was lower for the IBO firms than both industry and size-matched companies and performance-matched companies.
Professor Wood commented: “Despite - or because of - pay cuts and job losses, productivity in the sample firms remained significantly lower than in the control firms.
“This suggests that any supposed disciplinary benefits from job cuts, either in terms of ejecting the lowest strata of performers or incentivising surviving staff, have not resulted in material gains.
“Indeed, the productivity and profitability of the IBO firms remain lower than for the control firms during the four-year period following the takeover, suggesting that a climate of insecurity in tenure and reward reduces employee productivity and firm profitability.”
Report co-author, Professor Goergen, Professor of Finance at Cardiff Business School, argues: “This new study does indeed uncover several negative effects on employment from private equity acquisitions. It is important to note that this is for a particular type of private equity acquisition, ie so called institutional buy-outs (IBOs). While we can’t deny the research revealed a post-IBO drop in employment and wages, the study doesn’t imply that all private equity acquisitions are bad. In truth, the debate on the effects of private equity acquisitions going forward needs to be much more nuanced, with a view to distinguishing between the types of private equity acquisition and the positive and negative impacts they generate.”
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