Publicly listed companies taken private are more likely to downsize the company in the year after the buyout than industry peers, a recent study shows.
Research carried out by Warwick Business School, Cardiff University and Loughborough University analyzed pre and post buy-out performance at the 105 UK firms taken private between 1997 and 2006. It found that, compared with companies of a similar size operating in the same sector, incidences of downsizing is more common.
“We find strong evidence of a higher incidence of downsizing in the firms in the year following the acquisition, even when we adjust for differences in wage costs and productivity,” said Geoffrey Wood, professor of international business at Warwick Business School.
After buyout 59 percent of the acquired firms shed staff compared to 32 percent in the control group, he pointed out. The gap in turnover per employee was also found to be almost double in year four, for example, compared to that measured at the time of the acquisition.
But whilst the goal when reducing workforce and wages was to increase efficiency at newly acquired firms, these promised productivity gains rarely materialized, he argued. “Outsiders find it more difficult to cost the worth of a firm’s human assets, and their combined knowledge and capabilities. Hence, they are more likely to lay off staff and less aware of the consequences this may have for future performance,” added Wood.
New owners are not well equipped to evaluate not only individual human capital, he said, but also how people work together. “If you just look at labor from a purely cost point of view, using what is measurable, you can cut 10 percent of your labor costs and think it will systematically improve your productivity. But what it doesn’t tell you is how that 10 percent works with the rest of the workforce beyond one person.”
That was different from management buyouts, Wood said. Insiders find it easier to assess individual talents, he said, as well as understand their place within the overall company ecosystem.