Private Equity institutional buyouts see wages drop
by £10,000 four years later
Press release: Monday 1 December 2014
Workers will not only be worse off when their firm is taken over by private equity through an institutional buyout (IBO), but their company’s performance will fall behind its rivals.
New research has discovered that IBOs - defined as a highly leveraged transaction where one or more institutional investors act together to initiate a buyout deal - result in staff losses and a decrease in overall productivity.
Geoffrey Wood, Professor of International Business at Warwick Business School, said: “Our findings suggest IBOs and their impact on managerial practices do not appear to be an effective mechanism for turning round failing firms.
“I would argue, far from the notion they revitalise the acquired organisation and unlock dormant capabilities and value, our research suggests more often than not the opposite occurs.
“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.
“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.”
In the paper The employment consequences of private equity acquisitions: The case of institutional buy outs Professor Wood, 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 IBOs.
They looked at IBOs undertaken in the UK between 1997 and 2006, investigating the monitored firms’ performance and employment and wage figures six years before takeover through to four years afterwards. They compared these organisations, against a group of firms with similar performance and another group from the same industry.
The IBO companies’ median employment growth was 11 per cent five years before acquisition, falling down to 4.8 per cent the year after the deal.
Figures on salary suggest a similar trend with companies seeing a salary reduction from a mean of £29,460 before the IBO 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 IBO 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.
The research also highlighted productivity, measured in the research by calculating real turnover over employees, was lower for the IBO firms than both industry and size-matched companies and performance-matched companies.
Professor Wood commented: “Despite - or because of - pay cuts and job losses, productivity in the sample firms remained significantly lower than in the control firms.
“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.
“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.”
Report co-author, Professor Goergen, Professor of Finance at Cardiff Business School, argues: “This new study does indeed uncover several negative effects on employment from private equity acquisitions. It is important to note that this is for a particular type of private equity acquisition, ie so called institutional buy-outs (IBOs). While we can’t deny the research revealed a post-IBO drop in employment and wages, the study doesn’t imply that all private equity acquisitions are bad. In truth, the debate on the effects of private equity acquisitions going forward needs to be much more nuanced, with a view to distinguishing between the types of private equity acquisition and the positive and negative impacts they generate.”
For a copy of The employment consequences of private equity acquisitions: The case of institutional buy outs contact Ashley Potter at ashley.potter@wbs.ac.uk
To interview Professor Geoffrey Wood contact:
Email: Geoffrey.Wood@wbs.ac.uk
 
Or contact:
Ashley Potter
Press & PR Executive
Warwick Business School
The University of Warwick
Coventry
CV4 7AL
Tel: +44 (0)24 7657 3967
Mob: +44 (0)7733 013264
Email: Ashley.potter@wbs.ac.uk
Warwick Business School has in-house broadcasting facilities for TV and radio. We have an ISDN line for radio and for television interviews we have the Globelynx TVReady network, a list of Warwick experts is available. If you are looking for an expert in an area that is not listed, please contact Ashley Potter. Our ISDN number is 024 7647 1287. The Globelynx number is 02476 697332.
 
Notes to Editors
Warwick Business School, located in central England, is the largest department of the University of Warwick and the UK's fastest rising business school according the Financial Times. WBS is triple-accredited by the leading global business education associations and was the first in the UK to attain this accreditation. Offering the full portfolio of business education courses, from undergraduate through to MBAs, and with a strong Doctoral Programme, WBS is the complete business school.  Students at WBS currently number around 6,500, and come from 125 countries.  Just under half of faculty are non-UK, or have worked abroad.  WBS Dean, Professor Mark P Taylor, is among the most highly-cited scholars in the world and was previously Managing Director at BlackRock, the world's largest asset manager.
Cardiff University is recognised in independent government assessments as one of Britain’s leading teaching and research universities and is a member of the Russell Group of the UK’s most research intensive universities.  Among its academic staff are two Nobel Laureates, including the winner of the 2007 Nobel Prize for Medicine, University Chancellor Professor Sir Martin Evans.  Founded by Royal Charter in 1883, today the University combines impressive modern facilities and a dynamic approach to teaching and research. The University’s breadth of expertise encompasses: the College of Arts, Humanities and Social Sciences; the College of Biomedical and Life Sciences; and the College of Physical Sciences and Engineering, along with a longstanding commitment to lifelong learning. Cardiff's four flagship Research Institutes are offering radical new approaches to cancer stem cells, catalysis, neurosciences and mental health and sustainable places. www.cardiff.ac.uk