Private Equity Buyouts Hurt Company Performance

Companies taken over by private-equity firms see their aftermath performance slide behind their industry rivals, says a new study.

According to research by Warwick Business School, Cardiff University and Loughborough University publicly-listed firms that have gone through a private-equity buy-out in the UK between 1997 and 2006, did not have a performance boost as a result.

"What we found was the promised productivity gains of a takeover rarely materialised. Rather, there was evidence of private-equity buy-outs reducing the number of workers and squeezing wages, without making the firm more efficient," said Geoffrey Wood, Professor of International Business at Warwick Business School.

"A year before the firms were taken over, the average gap between them and the control group in terms of turnover per employee was £29,000. Four years after the buy-out that had widened to almost £89,000."

Researchers at the three universities say that during that decade, 105 publicly-listed UK companies were bought-out by private equity investors but instead of improving performance, it had led to the shedding of jobs and assets [Fig 1].

This led to the widening of the firms' performance gap, against the control group, as measured by turnover per employee.

"We find strong evidence of a higher incidence of downsizing in the firms in the year following the acquisition, even when we adjust for differences in wage costs and productivity," said Professor Wood

"In the first year after the buy-out 59% of the acquired firms reduce the size of their workforce compared to 32% in the control group that is a jump of 18% over the previous year." [Fig 2]

The report factored in a number of variables, such as market-wide trends in employment and the economy, when calculating the performance of the companies bought in an institutional buy-out by private-equity firms or funds.

It is the first research report of its kind to to be based on objective company data, say the researchers.

It compares companies taken over against a control group of comparable firms, which were not bought out by a private equity firm, and the time period corresponds to six years prior to a buy-out taking place and four years afterwards.

"While the existing literature argues that one of the reasons for private equity acquisitions is to rein in excessive labour costs there is very little evidence of workers earning wages above the market rate ahead of the takeover," said Professor Wood.

"Yet after the acquisitions there is evidence of a drop in mean and median wages.Why do firms that are taken over perform worse?

"We believe that it is because outsiders find it more difficult to cost the worth of a firm's human assets, and their combined knowledge and capabilities. Hence, they are more likely to lay off staff and less aware of the consequences this may have for future performance."