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Firms taken over by a private-equity buy-out see their performance fall even further behind their industry rivals, according to a new study.
Private equity raises money to buy a company with the primary objective of improving the fortunes of an under-performing firm to ultimately seek a re-flotation on the stock exchange or to sell it on at a profit.
But when researchers at Warwick Business School, Cardiff University and Loughborough University looked at all of the publicly-listed firms that had gone through a private-equity buy-out in the UK between 1997 and 2006 that was far from what they found.
During that decade 105 publicly-listed UK companies were bought-out by private equity investors and when their performance was compared against firms of a similar size in the same industry they found the productivity of the acquired firms lagged even further behind. Instead of improving following the shedding of jobs and assets the firms’ performance gap against the control group – as measured by turnover per employee - widened.
Professor Wood, who is Professor of International Business at Warwick Business School, said: “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.
I've written about the race to the lowest common denominator on worker pay and benefits. The study noted this PEU drive:
“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.
I expect the PECKER Council to respond vigorously. PECKER stands for Private Equity Capital Knowledge Executed Responsibly.
