Back to School: Take-privates may make companies safer

Businesses taken private through leveraged buyouts may be safer for employees, new research from the University of Texas and the U.S. Bureau of Labor Statistics suggests.

The paper, co-written by Jonathan Cohn (University of Texas-Austin), Nicole Nestoriak of the U.S. labor-statistics agency and Malcolm Wardlaw (University of Texas-Dallas), found workplace-injury rates at public-to-private LBO companies were 0.86 percentage point less than a control group’s.

While the difference appears minor, the newly private companies’ injury rate was 17 percent smaller than average, according to the paper.

“We were a little surprised,” Cohn said in an interview. “If we had expectations, it was probably that the results would go the opposite way of what we found.”

Private-equity firms are reputed to push for cost cuts at portfolio companies. Furthermore, “leverage tends to be positively correlated with workplace-injury rates,” Wardlaw said in an interview.

“Debt is this hard claim, and if you have a hard time meeting cash-flow (expectations), there’s a tendency to cut back on marginal investments in things like workplace safety.”

Cutting costs to meet debt obligations could lead some companies to reduce their investment in workplace safety. That said, publicly traded companies are subject to a variety of market pressures to meet short-term earnings expectations, which creates similar incentives to cut costs. Those pressures dissipate once a private-equity firm takes a public company private.

“The evidence is not super conclusive, but the (companies) that are most effective in a reduction in injury rates are the ones that have the most public pressure on them, and that gets relieved with a private-equity buyout,” Wardlaw said.

While companies in public-to-private deals became safer, injury rates at private companies acquired by buyout firms tended to tick upwards, according to the paper.

Many portfolio companies have very low injury rates before they are acquired. The rate rises the closer the company comes to being acquired. Then, following a leveraged buyout, injury rates appear to converge at levels similar to those seen at other, non-private-equity-backed businesses.

“What we see is that for some reason the private (companies) that tend to be targeted in buyouts tend to have lower injury rates before the buyouts,” Cohn said. The findings imply “those buyouts don’t seem to have either a positive or negative impact.”

Action item: To read the paper, visit http://bit.ly/1MwEJcE

Photo courtesy Reuters/Lee Celano