Private Equity Takeovers and Employment in the UK: Some Empirical Evidence

• Author: Geoff Wood,Noel O'Sullivan,Marc Goergen
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00853.x
• Published date: 01 May 2011
• Date: 01 May 2011

Private Equity Takeovers and Employment in

the UK: Some Empirical Evidencecorg_853259..275

Marc Goergen, Noel O’Sullivan,* and Geoff Wood

ABSTRACT

Manuscript Type: Empirical

Research Issue: This study investigates the employment consequences of private equity acquisitions, in particular institu-

tional buyouts (IBOs), in the UK. It involves a pre- and post-acquisition analysis of employment and performance charac-

teristics for a sample of acquired f‌irms and a matched sample of non-acquired f‌irms.

Research Findings: There is a signif‌icant decrease in employment in acquired f‌irms in the year immediately after the

completion of the IBO compared with non-acquired f‌irms. Further analysis fails to identify any parallel or subsequent

increase in f‌irm productivity or prof‌itability. This evidence suggests that the observed downsizing has not been effective

either in disciplining staff or imparting a clearer focus to activities.

Academic Implications: The results of this study add to our understanding of the employment effects of private equity

acquisitions, especially IBOs. Two important theoretical issues emerge. The f‌irst is a need to conceptualize skills and human

capabilities on a collective dimension, specif‌ic to a particular organizational setting, and the extent to which they contribute

to the organization’s performance. Thesecond is the importance of understanding managers as operating in particularsocial

settings, making subjective choices based on their specif‌ic knowledge and experiences.

Practitioner Implications: The main practitioner implicationof our study is that companies acquired via IBOs do not exhibit

increased productivity or prof‌itabilityin the wake of a signif‌icant reduction in employment. Thishighlights the need for new

management to better understand the link between employment and performance in the specif‌ic corporate setting of the

acquired f‌irm.

Keywords: Corporate Governance, Private Equity, Institutional Buyouts, Takeovers, Employment, UK

INTRODUCTION

There is an emerging research interest in the relationship

between governance, sources of company f‌inance, and

the consequences for employees, with existing work pre-

dominantly focusing on comparisons of the effects of

national regulatory regimes (Botero, Djankov, La Porta,

Lopez-de-Silanes, & Shleifer, 2004; Goergen, Brewster, &

Wood, 2009). Such issues tend to become especially high-

lighted in the case of takeovers of public companies by

private equity investors. Private equity acquisitions have

been on the increase since the late 1990s (Renneboog,

Simons, & Wright, 2007) and the increased takeover activity

by private equity houses has been causing public concern

about its consequences. While the involvement of private

equity in the takeover of public companies traditionally

focused on relatively small companies, often facilitating

management buyouts, more recent transactions have high-

lighted the potential for some of the largest UK companies to

be the targets of such acquisitions (e.g., Alliance-Boots).

Indeed, Thornton(2007) suggests that as many as 20 per cent

of all private sector workers in the UK are employed by

organizations with some private equity investment. This has

raised concerns about the welfare of substantial numbers of

employees with employee representatives calling both for

greater transparency from private equity acquirers and leg-

islative changes to safeguard employee rights. For example,

on 24 February 2007, Brendan Barber, the General Secretary

of the Trades Union Congress (TUC), challenged private

equity investors to attend a roundtable and “to tell [the

public] what they stand for and whether they accept any

responsibilities to their workforce or the wider community”

(Barber, 2007:1).

The objective of this study is to investigate the impact of

private equity acquisitions on employment and employees

in a sample of UK private equity acquisitions. Our study

focuses specif‌ically on institutional buyouts (IBOs). We

*Address for correspondence: Noel O’Sullivan, Management School, University of

Sheff‌ield, 9 Mappin Street,Sheff‌ield, S1 4DT, UK. E-mail: c.n.osullivan@sheff‌ield.ac.uk

259

Corporate Governance: An International Review, 2011, 19(3): 259–275

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00853.x

examine whether there are changes to employee numbers,

employee productivity, and employee remuneration, as well

as prof‌itability both in the years prior to the acquisition and

in the post-acquisition period. We also utilize an industry

and size-matched control sample of non-acquired f‌irms in

order to isolate precisely the employment consequences of

our sample of private equity acquisitions. Our study pro-

vides an important and contemporary empirical contribu-

tion to the ongoing public debate on the impact of private

equity acquisitions and also serves as a useful contribution

to existing academic research on the employment conse-

quences of corporate takeovers.

Much of the existing research on the employment conse-

quences of takeovers has been motivated by the Shleifer and

Summers (1988) seminal article where they argued that a

change in ownership permits new management to renego-

tiate the implicit contracts of employment of existing

workers resulting in a breach of trust insofar as it violates

prior expectations attached to employees’ implicit labor con-

tracts. Subsequent research has sought to address this ques-

tion by investigating the impactof takeovers on employment

and/or wages both in the context of takeovers generally

(e.g., Denis, 1994; McGuckin & Nguyen, 2001; Conyon,

Girma, Thompson, & Wright, 2001, 2002, 2004; Beckman &

Forbes, 2004; and Gugler & Yurtoglu, 2004) and specif‌ically

in the context of management buyouts (MBOs) (e.g., Licht-

enberg & Siegel, 1990; Bacon, Wright, & Demina, 2004;

Amess & Wright, 2007; Weir, Jones, & Wright, 2008; Amess &

Wright, 2011). Overall, there is little consistent support for

the Shleifer and Summers (1988) hypothesis with research-

ers identifying different f‌indings depending on whether the

acquisition is hostile or friendly, the type of staff (white

collar versus production staff), the extent of post-acquisition

divestment, and also the period being studied.

Research examining the employment effects of private

equity takeovers is only now emerging in the literature,

often forming part of a larger study of takeovers and/or

MBOs generally (Amess, Brown, & Thompson, 2007; Amess

& Wright, 2007, 2011; Weir et al., 2008). However, studying

private equity acquisitions, specif‌ically IBOs, as a homog-

enous group has potential to take forward our understand-

ing of this increasingly important phenomenon in a number

of respects. First, private equity-backed IBOs typically

involve the complete replacement of existing managers,

hence weakening the social and implicit employment agree-

ments with employees. Consequently, incoming managers

are likely to take a more objective view of how best to utilize

employees in the pursuit of owner wealth, raising questions

about both employment levels and wage levels. Second,

private equity-backed IBOs are often f‌inanced by signif‌icant

levels of debt and this debt burden is likely to put additional

pressure on management to seek economies, especially in

reducing the overall wage bill. Third, it is generally antici-

pated that private equity acquirers will seek to recover their

investment and any prof‌its within a reasonably short time-

frame so may be more focused in seeking to eliminate unnec-

essary costs as soon as possible after the takeover, putting

employees and associated costs particularly under the

spotlight.

The paper is structured as follows. The next section pro-

vides a comprehensive review of prior research on the

impact of ownership changes on employment and employ-

ees, concluding with a discussion of the likely impact of

private equity acquisitions on employment. The following

section introduces the sample, variables and outlines the

research methodology. This is followed by our empirical

analysis. Our conclusions, limitations of our study, and a

discussion of the academic and practitioner implications of

our f‌indings are presented in the f‌inal section.

OWNERSHIP CHANGES AND THE

CONSEQUENCES FOR EMPLOYEES

Changes in company ownership have been an important

area of academic inquiry in the economic and f‌inance litera-

ture over the past 50 years. The vast majority of work in the

area has focused on the economic impact of takeovers of

public companies, initially in relation to changes in market

share and the effect of mergers on competitiveness and

more recently examined issues surrounding wealthchanges,

specif‌ically in respect of shareholders in the bidder and

target f‌irms. Central to much of this research has been the

assumption that takeovers are an important mechanism for

achieving the most eff‌icient use of corporate assets (Manne,

1965; Jensen, 1986). This view is further strengthened by the

signif‌icant premiums acquiring companies pay in order to

obtain control of another f‌irm’s assets (Andrade, Mitchell, &

Stafford, 2001). In an environment of companies being

acquired for prices signif‌icantly in excess of their market

value, a key question concerns the sources of the expected

wealth gains.

In a seminal article, Shleifer and Summers (1988) argued

that one potential source of wealth extraction may come

from the target f‌irm’s employees since a change in owner-

ship permits new management to renegotiate the implicit

contracts of employment of existing workers. How this may

occur in practice, in addition to the laying off of staff, has

been discussed by a number of researchers. For example,

employees may work for lower wages early in their career

and remain committed to the organization in the expectation

of higher wages as they advance up the salary scale.

However, given that older workers are likely to be more

expensive, f‌irms have an incentive to renege on this implicit

arrangement, a process that may be facilitated by a takeover

(Beckman & Forbes, 2004).

Researchers have also suggested that the nature of the

takeover may inf‌luence subsequent employment. For

example, Conyon et al. (2002) argue that the risk of a rene-

gotiation of employment contracts is more likely in the case

of hostile acquisitions for two reasons. First, the fact that the

incoming management team acquired the f‌irm against the

wishes of the company is a clear signal that the new man-

agement team would pose a very credible threat in any

confrontation with employees.Second, the fact that the man-

agement team is new means it is unlikely to have developed

any signif‌icant ties with existing employees in the same way

that the incumbent management team would. Denis (1994)

suggests that employees are more likelyto come under pres-

sure after a horizontal takeover,where two companies in the

same industry come together, because a signif‌icant level of

duplication is expected to exist after the takeover. Further-

260 CORPORATE GOVERNANCE

Volume 19 Number 3 May 2011 © 2011 Blackwell Publishing Ltd