Barbarians at the chemist's counter

The outbreak of a bidding war between two groups of private equity investors for control of Alliance Boots, the chemists and drugs group, will reignite the debate over whether this type of ownership is good or bad for companies, their workers and the country in general.

On the same day that the Boots’ board backed a £10.6bn takeover bid from Kohlberg Kravis Roberts (KKR) and Boots' executive deputy chairman Stefano Pessina, a rival appeared on the scene. A group that includes private equity firm Terra Firma, medical charity The Wellcome Trust, and banking group HBOS outlined a conditional bid worth 2.3 per cent more.

Whoever wins, it will mark the first time that a FTSE 100 company has been taken out of public ownership by a private equity consortium. If KKR wins it could turn out to be as symbolic as the group’s $31bn takeover of RJR Nabisco in the 1980s that was portrayed in the bestselling book Barbarians at the Gate.

The issue has fallen out of the news in the wake of the collapse of the private equity bid for J Sainsbury, the supermarket company, which was seen as a sign that shareholders and directors were prepared to resist such approaches. This means that the debate over the merits of private equity, which hit the headlines when trade unions mounted protests at job losses at the AA vehicle recovery group following its takeover, will be back in the media spotlight.

This seems a good moment to draw attention to a report that Clarity Economics carried out for the Work Foundation.
It found that private equity firms that took over companies and bring in new management teams were likely to cut jobs and depress employees’ wages.

Analysis of independently gathered data, which tracks companies as they enter and exit from ownership by private equity funds, found that MBOs (which account for the majority of private equity deals) cut jobs in the first year, but expand them thereafter - by an average of 36 per cent over six years. Yet workers are £83.70 a year worse off than other private sector workers because wages grow more slowly.

Where an outside management team is introduced to an organisation in a management buy-in, employment falls on average by just under a fifth (18.25 per cent) over a six-year period. And workers are on average £231 a year worse off than other private sector workers

Private equity firms tend to introduce strict new performance management systems such as performance and merit pay, regular performance appraisal, and new human resource management systems. Some 40 per cent of managers in PE firms say they are hostile to trade unions. Just one in 10 said they were positive about the role of unions.

Read the full report here: http://www.theworkfoundation.com/Assets/PDFs/private_equity.pdf