Private equity deals are catalyst for change in business buyouts

by Ross Bentley

The growing trend towards private equity buyouts has seemingly gathered pace, with an increasing number of high-profile deals making the national headlines in recent months.

High-street retailer Alliance Boots

ooks set to be the first FTSE 100 firm to fall into private equity hands following an £11.1bn takeover bid by its deputy chairman Stefano Pessina and private equity group Kohlberg Kravis Roberts.

Growing market

Supermarket giant Sainsbury’s

has also been stalked by private equity buyers CVC

and Blackstone.

This activity is the continuation of a trend that last year saw European private equity-backed deals reach £117.5bn, a 41% increase on 2005, according to figures from private equity specialist Candover.

These deals typically see private firms buy companies with money from wealthy individuals and financial institutions. Sean Connolly, a director at change management consultancy Egremont,

said the deals were characterised by swift cost-cutting and an increase in debt on the balance sheet, usually as a result of borrowing to finance the purchase.

Lucrative loophole

“Private equity firms typically look for a return of 20% to 30% over a three- to five-year period before selling the business again or floating it on the stock market,” he said. Private equity has flourished in the UK because firms can claim tax relief on interest payments on the debt used to buy the businesses – a loophole unions want to close.

But deals of this nature are not a new phenomenon, according to Rod Ball, a research fellow at the Centre for Management Buy-out Research at Nottingham University,

which has been tracking private equity activity for 20 years. He said deals were only starting to come to the public’s attention because of the large sums involved.

With this new-found profile, arguments over what these takeovers mean for HR and the workforce have gained momentum.

Ball said it was hard to generalise as each deal must be taken on its merits. He pointed to the successes at fashion store New Look

and hotel chain Travelodge,

both now under private equity stewardship, where new jobs have been created and more sites opened.

Asset stripping

But opponents point to internal wrangling at companies, such as motoring services group the AA, as an example of the downside of private equity takeovers.

Paul Maloney, national organiser for the AA

section of the GMB union,

claimed the company had cut more than 3,000 jobs and been saddled with huge debt since it was bought for £1.75bn by private equity firms Permira

and CVC in 2004.

“[The private equity buyers] have asset-stripped the company and taken £500m out in bonuses,” he claimed. Maloney added that employees working on road patrols were being moved on to a performance-related pay scheme. He said this had led to a decline in customer service and compromised the safety of overworked staff.

“We want the owners to pay back the money they owe and put the firm back into public ownership,” he said.

But the GMB’s rival, the AA Democratic Union (AADU),

said many of the job cuts came from selling off fringe businesses, such as a tyre-fitting service and a chain of garage outlets. The redundancy packages also compared favourably with those offered to workers at the likes of Rover and Asda, said AADU national secretary Alistair MacLean.

“The new private equity owners move fast and make changes quickly but they are willing to pay for it,” he said.

With no shareholders to deal with, the ability of the new owners to get things done at speed is something that the AA’s HR director Martin Sawkins has appreciated.

“The pace is faster and, with reduced overheads, the business is easier to understand,” he said.

Commercial view

Sawkins added that, in this no-nonsense environment, HR was expected to understand business drivers and to argue its corner from a commercial standpoint. He said the job cuts at the company had created a much leaner operation where talent is allowed to thrive and young managers have access to a greater number of development opportunities.

“If you take out 10% of the workforce, people try to do things the same way, but with fewer people. By reducing the headcount by 25% to 30%, you are really forced to think and act differently,” said Sawkins.

With the private equity bandwagon moving quicker and quicker, HR professionals would be wise to ensure they keep track of this growing trend.

Private equity deals: implications for HR

Sean Connolly, a director at change management consultancy Egremont, said HR teams faced with the prospect of a private equity buyout could prepare themselves in a number of ways:

– Know your organisation Private equity buyers will have to formulate a business plan, which the HR team may be asked to provide data for. If your organisation is being eyed by private equity, ensure you have easily accessible information on areas such as employee performance and talent management.

– Devise a communications strategy Speculation about takeovers can cause anxiety among the workforce, so HR must keep employees informed about the situation as best it can. Where there is a communication vacuum, people will fill it with rumours.

– Anticipate what a private equity buyer might doPrivate equity deals are typified by a radical review of costs and, where possible, an outsourcing of operations. If a deal of this kind looks on the cards, then consider what areas of your remit may come under scrutiny, and anticipate potential outcomes.

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