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.

Answer:

In order to answer this question, a student is expected to understand 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.

• Institutional Buy-Outs by Private Equity investors are often 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.
• Generally speaking, private equity provides an “early warning system”, encouraging firms to embark on “healthy” size adjustments of the workforce, reversing a historical tendency towards excess capacity, brought about not only by changes in demand but also changes in technology like Enterprise Resource Planning, Order Management Systems etc.
• Reducing agency problems and enhancing cash flow; however, this account recognizes that there is much diversity within the sector and help in encouraging a narrowing of focus and a much needed specialization of the units in a firm.
• If organizations are in debt for many years, this could negatively impact on their future capacity to reinvest in people or otherwise.
• Evidence suggesting of initial job losses after the acquisition but no evidence of increased efficiency or productivity by those employees who remain.
• These findings imply that private equity investors need to think more carefully about how best to maximise their wealth from taking firms private, with a particular need to think beyond just cost-cutting.
• HR managers in the target organization face with the unenviable task of managing job cutting, and dealing with the knock-on consequences, ranging from the survivor syndrome to losses of expertise and capabilities.
• When one adjusts for differences in wage costs and differences in productivity the strong evidence of a higher likelihood of downsizing in target firms persists.
• One can find evidence of lower labour costs in the target firms pre-acquisition, which persists post-acquisition, where, again, lower productivity is encountered vis-à-vis the control group; this would suggest that incoming managers neglect the human dimension, other than in terms of controlling costs.
• As the commitment towards the vision , mission and values of the organization tend to dwindle in these circumstances for the employees, it becomes difficult for the employees to stick with the firm impacted by a PE investor.
• In short, organizational commitment declines, employee trust is shattered, employee motivation is also on all time low, and employee intentions to stay in the organization are also not there.

In the end, a student should summarize the findings and one can add or delete the points as per the answering requirements.