Study: take-privates underperform industry peers

UK companies delisted by private equity groups see their productivity drop after being bought out, according to fresh research, suggesting that cost-cutting efforts generally fail to generate efficiency gains.

Publicly listed companies shouldn’t expect a productivity boost following private equity buyouts, a recent study suggests. 

Research carried out by Warwick Business School, Cardiff University and Loughborough University analysed pre and post buy-out performance at the 105 UK firms taken private between 1997 and 2006. It found that, compared with companies of a similar size operating in the same sector, productivity at the private equity-owned businesses actually worsened post-acquisition. The gap in turnover per employee was found to be almost double in year four, for example, compared to that measured at the time of the acquisition. 

This shouldn’t be surprising, commented Geoffrey Wood, professor of international business at Warwick Business School, during an interview with Private Equity International. “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.” 

After buy-out 59 percent of the acquired firms shed staff compared to 32 percent in the control group, he pointed out. 
But whilst the goal when reducing workforce and wages was to increase efficiency at newly acquired firms, these promised productivity gains rarely materialised, he argued. “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.”

New owners are not well equipped to evaluate not only individual human capital, he said, but also how people work together. “If you just look at labour from a purely cost point of view, using what is measurable, you can cut  10 percent of your labour costs and think it will systematically improve your productivity. But what it doesn’t tell you is how that 10 percent works with the rest of the workforce beyond one person.”

That was different from management buyouts, he said. Insiders find it easier to assess individual talents, he said, as well as understand their place within the overall company ecosystem.

This research runs contrary to another recent study that shows that returns on take-privates, although marginally lower than returns on leverage buyouts, tend to be less volatile. This suggests that, at least at the time of exit, take-privates display comparable performance, at lower risk, than other types of buyouts – including MBOs.