Academics from the UK have found that companies taken over by private equity firms face staff losses and a decrease in overall productivity that seldom improves over a four year period.
In the paper The employment consequences of private equity acquisitions: The case of institutional buy outs Geoffrey Wood of Warwick Business School, 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 institutional buyouts (IBO).
“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,” said Wood. “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.”
The research found that the companies’ median employment growth was 11 percent five years before acquisition, but that figure fell to 4.8 percent the year after being bought by private equity.
Figures on salary suggest a similar trend with companies seeing a salary reduction from a mean of £29,460 before the acquisition 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 acquisition 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.
This is not the first time this group of academics has found fault with the private equity model. Last year they released a paper that said publicly listed companies taken private are more likely to downsize in the year after the buyout than industry peers.