Private equity buy-outs fail to boost performance – UK study

Analysis of business statistics for the period 1997-2006 by academics at Warwick Business School, Cardiff University and Loughborough University in the UK, has found that a large proportion of the firms taken over through private equity buy-outs failed to subsequently outperform their peers.

The data focused on institutional buy-outs, which the study’s authors – professor Geoffrey Wood of Warwick, Marc Goergen of Cardiff and Noel O’Sullivan of Loughborough – said made up almost half of all public-to-private buy-outs studied during the period.

Comparison of 105 publicly listed firms that went through a buy-out found that rather than improving performance, as measured by turnover per employee, they tended to fall further behind compared to a control group.

Wood said: 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.”

“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.

“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. 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.

“It is not a universally toxic industry, unlike IBOs, those firms bought-out by the management do improve performance, because they understand and appreciate their human assets.”


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