PRIVATE EQUITY THREAT In recent years many organizations in the private sector have been confronted with aggressive investor’s also known as private equity firms

Subject:Operations ManagementPrice:3.87 Bought7

Share With

PRIVATE EQUITY THREAT

In recent years many organizations in the private sector have been confronted with aggressive investor’s also known as private equity firms. A private equity buyout of a public firm may occur as a result of underperformance, high levels of free cash flow, or the need for organisational change. After the buyout, the company has large debts that need to be serviced, which reduces the managerial room to manoeuvre. The private equity firms and their managers not only acquire large ownership stakes, but often also take an active role in monitoring the buyout company and in strategic decision making.  

Private equity firms are often considered barbarians at the gate, only interested in short term financial performance through reorganizations, cost reduction actions and splitting up firms. The debt of the private equity transaction is often put on the shoulders of the organization that was taken over.

Blue Technology is a large, high-technology engineering company (10,000-plus employees). The company is a conglomerate with four divisions operating relatively independently. The business activities of the company include technical maintenance of advanced industrial production systems, maintenance of specific airplanes, building high-tech machines for the food industry and building high-tech printing machines. All business divisions have been profitable for the last two years. Some financial analysts, however, argue that there is much more potential within each of the four units.

An active shareholder with 1,5% of Blue Technology’s share ownership has publicly announced dissatisfaction with the company’s financial results and the corporate strategy. This active shareholder is a private equity firm that is known for searching the market for potential acquisitions. The shareholder suggests a major reorganization, splitting the company into four separate firms, and selling at least two of these firms.

The announcement is broadly communicated in the media (e.g. newspapers, television). The top management of Blue Technology is taken by surprise and the employees of Blue Technology are shocked with the potential prospect of major reorganizations.

Question 1

Discuss the possible effects on the employees of Blue Technology with regard to organizational commitment, employee trust, employee motivation, and employee intentions to leave the organizations.