The consequences of private equity acquisitions for employees: new evidence on the impact on wages, employment and productivity

• DOI: http://doi.org/10.1111/1748-8583.12032
• Published date: 01 April 2014
• Author: Noel O'Sullivan,Marc Goergen,Geoffrey Wood
• Date: 01 April 2014

The consequences of private equity acquisitions for

employees: new evidence on the impact on wages,

employment and productivity

Marc Goergen, Cardiff Business School, Cardiff University

Noel O’Sullivan, The School of Business and Economics, Loughborough University

Geoffrey Wood, Warwick Business School, University of Warwick

Human Resource Management Journal, Vol 24, no 2, 2014, pages 145–158

There is growing controversy on the HR consequences of private equity acquisitions, especially when the

existing management team is replaced. Much of the debate thus far has centred on the use of limited

panels of case studies and industry surveys. This article, in contrast, uses both in-depth interviews with

relevant stakeholders and objective company data to compare firms subject to private equity acquisitions

against a control group of non-acquired firms. Our interviews provide insights into key issues that are

investigated in the subsequent empirical analysis. Our core findings are that firms subject to a specific

type of private equity acquisition – institutional buyouts – are associated with job losses, lower wages

and lower productivity. This evidence is consistent with the notion that this type of private equity

acquisition has negative employment consequences without any corresponding improvement in

productivity.

Contact: Professor Geoffrey Wood, Warwick Business School, University of Warwick, Gibbet

Hill Rd, Coventry CV4 7AL, UK. Email: geoffrey.wood@wbs.ac.uk

INTRODUCTION

This is a study of the implications of private equity takeovers on employment,

productivity and wages, looking specifically at the case of institutional buyouts (IBOs).

In recent years, there has been increasing controversy surrounding the role of private

equity acquisitions, specifically in terms of their effect on workers in the target organisations.

To its proponents, the private equity industry provides new sources of funding and also helps

solve the agency problem via the reversal of value-destroying ‘empire building’ by managers,

and by doing so disciplines and reenergises the remaining employees (Jensen, 2007). In contrast,

critics argue that private equity acquisitions represent the ultimate expression of predatory

financialised capital (Folkman et al., 2007), focusing on the short-term maximisation of

shareholder wealth without any consideration for the interests of other stakeholders,

specifically employees.

Not only is private equity a diverse phenomenon, but the evidence base for existing debates

is also very diverse. Many existing studies rely on case studies (Froud and Williams, 2007a,b),

while others utilise surveys of representatives of the industry (see, e.g., Bacon et al., 2004). In

contrast, this study uses company annual reports from a sample of acquired firms both before

and after the acquisition, compared against a control group of non-acquired firms. While there

is much discussion as to the relative superiority of company data over subjective perceptions,

with some accounts suggesting that the results are broadly comparable, and indeed

interchangeable (Dess and Robinson, 1984), others have argued that industry surveys are less

reliable as managers are likely to overstate performance and downplay limitations in order not

to draw attention to any failings on their behalf (Bjorkman and Budhwar, 2007; Razouk, 2011).

bs_bs_banner

doi: 10.1111/1748-8583.12032

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 2, 2014 145

© 2014 John Wiley & Sons Ltd.

Please cite this article in press as: Goergen, M., O’Sullivan, N. and Wood,G. (2014) ‘The consequences of private equity acquisitions for employees:

new evidence on the impact on wages, employment and productivity’. Human Resource Management Journal 24: 2, 145–158.