Private Equity Isn’t Big Job Killer, Report Says
January 28, 2008

Tell the people at Chrysler, whose employer is now private-equity firm Cerberus Capital Management, this one: Private-equity firms aren’t the big job killers people have thought they were.

Private-equity deals don’t kill as many jobs as previously thought but they don’t create any either, according to, what The New York Times, called “perhaps the most extensive study” on whether the company buyouts by private-equity firms create jobs or result in more layoffs.

The results of the study, entitled “Economic Impact of Private Equity” and released last week at the World Economic Forum in Davos, Switzerland, examined 5,000 private-equity transactions from 1980 through 2005.

Bottom line:It showed companies owned by private-equity firms shed on average about 1 percent more jobs than their peers.

The New York Times report on the study noted: “While the results run counter to the ‘(buy it, strip it, flip it)’ image of private equity, some buyout executives had been hoping for an even more glowing report.”

Commissioned a year ago, the study was intended to create a set of measurements to further the debate about the impact of private equity amid the buyout boom. It was led by Josh Lerner, professor at Harvard Business School, and Steven J. Davis, professor at the University of Chicago’s Graduate School of Business, under the guidance of an advisory board that included policy makers, academics, labor representatives and private-equity executives.

Intriguing Findings

Among findings cited by The New York Times:

Two years before a buyout a company cuts, on average, 4 percent more of its work force compared with its peers, probably because it is struggling or trying to prepare for a sale;

After a buyout the numbers muddy a bit. The acquired company, on average, cuts 7 percent of its workforce over two years, but at the same time, it adds jobs -- usually new positions and in new locations -- at a pace of about 6 percent, resulting in a net loss of 1 percent.

By the fourth and fifth years of private-equity ownership, the growth of a company’s workforce becomes similar to its public peers.

The study did not look at new or lost jobs abroad.

“I thought the numbers would be more positive,” Joseph L. Rice III, chairman of Clayton, Dubilier & Rice, who led the study’s advisory board, told The New York Times. “A fair conclusion from the numbers is there is no pluses or minuses. You wouldn’t say that private equity is the demon that some say it is, nor would you say it is the savior.”

More Questions Than Answers

The New York Times noted some findings raised more questions than answers. For instance:

The study said 6 percent of all buyouts eventually end in a bankruptcy filing, slightly higher than the average for public companies. However, compared with those public companies with similar junk debt ratings, buyout companies defaulted at half the rate.

The study noted although the news media often focuses on large deals that move public companies into private hands, such deals reflected only 6.7 percent of the total number of buyouts since 1980. Measured in terms of dollar value, public-to-private transactions represent 28 percent of the firms acquired.

The study did not examine what would have happened to employment had the buyouts not occurred.

Industry on the Defensive

The release of the study came a week after the private-equity industry released its own report examining 42 large companies acquired by eight private-equity firms from 2002 to 2005. Commissioned by the lobby group Private Equity Council, that study showed employment grew 8.4 percent among acquired companies, The New York Times reported.

The two studies did not examine the same deals. Harvard's Lerner told The New York Times the samples in the industry-backed study were selected by the buyout groups, not randomly chosen, and represented only a small number of transactions. He called it “part of a multimillion-dollar lobbying plan by an industry on the defensive.”

He added in the newspaper's interview: “There is little reason to trust and no way to verify self-reported claims by the super-secretive buyout industry."

Posted by Michelle Krebs at 5:08 AM under Analysis , Chrysler , Companies | Comments (0) | digg this | Seed Newsvine