Private equity buyouts rarely turn around failing businesses: Academic
Long-held beliefs that private equity buyouts can revive the flagging fortunes of struggling businesses are being refuted by British researchers.
Academics from the University of Warwick have found that firms taken over by private equity firms result in staff losses and a decrease in overall productivity that rarely improves over a four-year period.
Professor of International Business at Warwick Business School, Geoffrey Wood said that research had shown that institutional buyouts were not an effective mechanism for turning around failing businesses.
"I would argue, far from the notion [that] they revitalise the acquired organisation and unlock dormant capabilities and value, our research suggests more often than not the opposite occurs," he said.
"Our core finding shows a significant loss in employment in firms subject to an institutional buyout immediately following the takeover. What's more, wages tend to fall well below the market rate.
"Perhaps this could be 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."
The researchers looked at private equity buyouts in the UK between 1997 and 2006, and investigated the firms' performance, employment and wage figures six years before the takeover through to four years after.
Data found that employment growth fell from 11 per cent five years before the acquisition to 4.8 per cent the year after the deal was completed, with salaries also declining in the same period.
By contrast, industry and sized matched companies saw their mean salaries increase significantly over the research period, leaving employees of businesses acquired by private equity as much as £10,000 (approximately $17,500) worse off than those working for similar companies.
"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," he said,.
"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."
AUTHOR
Nicholas O'Donoghue
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