Whether portfolio companies owned by buyout shops create or destroy jobs has been the subject of much debate and research this year.
If Congress and the president were convinced that buyout firms create jobs, and therefore do some good for their portfolio companies and the economy at large, they’d be less likely to tamper with the institution. By contrast, were they convinced buyout firms destroy jobs, they’d feel just fine about the tampering.
But here’s the unfortunate truth. Whether portfolio companies create or destroy jobs in aggregate has little to say about whether they’re doing a good job for their portfolio companies. Further, reliable U.S. statistics on the subject are not available, and may never be. Many buyout shops don’t maintain the required records.
A typical buyout investment, by Boston-based The Berkshire Group, illustrates how empty a concept job growth can be in understanding the value buyout firms bring to portfolio companies. Dino Mauricio, who last month joined corporate restructuring and turnaround firm Getzler Henrich as managing director-M&A integration, from 1998 to 2002 worked at The Berkshire Group on the consolidation of half-dozen or so Canadian janitorial services companies. (Most recently Mauricio was managing director of business development at General Electric.) The result was the creation of a nationwide giant, SMS Modern Cleaning Services, employing more than 7,000 people.
Largely because of overlap in mid-management positions, the firm typically reduced head count by 10 to 15 percent in the early going of its acquisitions, according to Mauricio. (Buyout firms are bad for jobs!) However, over time the company grew so much organically that it created more than enough jobs to make up for this initial loss. (Buyout firms are good for jobs!) Then again, one of the ways the firm grew was by putting Mom and Pop cleaning services out of business. (Buyout firms are bad for jobs!) On the other hand, many of those put out of work ended up joining SMS Modern Cleaning Services, which provided more stable employment. (Buyout firms are good for jobs!)
Needless to say, buyout firms often eliminate jobs after acquiring companies, and for reasons that serve those companies well-to take advantage of low-cost labor overseas, to exit old lines of business, or perhaps to get costs in line with industry averages. Once their charges are on track, buyout shops may give their blessing to adding headcount. But buyout firms that eliminate more jobs than they create have no less claim to doing what’s best for their portfolio companies than buyout firms that create more jobs than they destroy. It all depends on the challenges and opportunities portfolio companies face, and the point at which the buyout firm sells them.
You wouldn’t know this by reading the literature on the subject. One of the industry’s most venomous critics, the Service Employees International Union, weighed in on the question in an August press release titled “SEIU Taking Action To Curb Buyout industry’s Growing Excesses.” The union found that “in the last year alone, at least 10,000 layoffs have been announced as a result of private equity buyouts.”
Over at the Web site of the Private Equity Council, an industry trade association, you’ll encounter a different point of view. There you can learn of a study by the European Venture Capital Association demonstrating that from 2000 to 2004 “employment in private equity-backed companies rose by 5.4 percent, almost eight times higher than the European Union average of 0.7 percent.” (In fact, according to EVCA, those figures represent annual growth rates for both venture capital and buyout-backed companies; the figure for buyout-backed companies only is 2.4 percent.)
On the more independent side, the transaction advisory services division of Ernst & Young recently published a study of the largest U.S. and European exits of 2006. It found employment levels equal to or greater than at acquisition in 80 percent of U.S. deals, and 60 percent of European deals. Meantime, according to The Wall Street Journal, Josh Lerner of Harvard Business School and Steven Davis of the University of Chicago’s Graduate School of Business have released preliminary results of research suggesting that, compared with competitors, portfolio companies generally eliminate more jobs, or add fewer jobs.
Other than being contradictory, here’s the problem with research of this kind. Many buyout firms don’t keep records of how many employees worked at the targets of add-on acquisitions before they buy them. Ernst & Young would have liked to demonstrate how much job growth stemmed from add-on deals versus organic growth. It couldn’t. In interviews with subjects of the study, the consulting firm found the data wasn’t always available, according to John Vester, a partner who co-led the study.
Vester said that the typically small U.S. add-on acquisitions made by portfolio companies in his study had little impact on job growth. Also, the firm did learn from study participants what percentage of their revenue growth was generated organically. Still, using Ernst & Young’s methodology, a 1,000-person portfolio company acquiring a 1,000-person company, then slashing 500 jobs, would count as 50 percent job growth. (EVCA dealt with this issue by eliminating from its pool buyout-backed companies with employment growth rates above 20 percent, on the assumption those would have involved significant add-on acquisitions.) Presumably other researchers studying the subject will run into the same roadblock. Lerner declined to comment on the methodology he and Davis are using in their study.
How many jobs are buyout firms creating or destroying? We’ll probably never know for sure. Then again, does it matter whether we do or not?