Comment on Davis, Haltiwanger, Handley, Lipsius, Lerner, and Miranda, "The Economic Effects of Private Equity Buyouts"

October 08, 2019

The research team that brought you a study that compared employment dynamics in companies taken over by private equity with similar companies not acquired by PE (“Private Equity, Jobs, and Productivity,” American Economic Review 2004) is out with a new paper. The news for workers, already troubling in their earlier report, is even worse this time around.

In the earlier study of employment effects of private equity buyouts (Davis, Haltiwanger, Handley, Jarmin, Lerner, and Miranda 2014), the researchers looked at what happened to employment following the private equity buyout in establishments owned by the target company at the time the buyout occurred   as well as what happened to employment in the target firm. The new study examines only what happens to employment in the target firm.

This is an important difference, and raises the question of why the employment effects in establishments is not part of the analysis in the just released paper.

In the earlier analysis the authors point out that they can readily track establishments over time. Establishments have a unique identifier in government data that they retain even if they are sold from one firm to another.  In the earlier paper, they track employment at establishments for five years following the PE buyout. They find in that analysis that employment in target establishments is below employment growth in similar establishments not taken over by private equity by a cumulative 3.2 percent of initial employment in the first two years and 6.4 percent over five years.

Tracking firms, however, is more difficult. Firm IDs disappear over time because of mergers or complex reorganizations in which parts of the firm are acquired by multiple firms. They write, “To reduce the number of observations lost for this reason, we limit our firm-level analysis to years 1 and 2 after the buyout.”

Even in the first two years following the buyout, firms are lost from the data set – and of course, it’s not clear what happened to employment at those firms. But there are several bigger issues. First, cumulative employment losses at establishments are larger over the five-year period than over the two-year period. Not looking at establishments means we don’t really know what the cumulative employment effects are over the longer time period. 

Looking at firm data on overall employment does not tell us what happens to the jobs of workers in the establishments originally owned by the target firm. Instead, we get a measure of employment that also includes the jobs of workers at companies later acquired by the target firm. These are jobs that the PE-owned firm acquires – not jobs that it creates. This maneuver has the effect of understating the extent of job loss in the target firm.

In the current paper, the researchers do carry out an analysis that looks only at what happens to jobs in the original establishments owned by the target firm. They find that employment falls by 4.4 percent  when post-buyout acquisitions and divestitures are omitted and they consider only employment changes in the original establishments owned by the firm. For workers in a firm that has been acquired by private equity, this is the relevant figure. Note that this is larger drop than what they found in the earlier paper. This job loss falls to a much more modest 1.4 percent when acquisitions and divestitures are included. This is also a steeper drop than in the earlier paper.

The finding in the current paper that employment falls 13 percent in buyouts of publicly-traded companies is a pretty damning statement about the job destroying effects of PE takeovers of successful companies that trade on a stock exchange. 

The 13 percent increase in employment following buyouts of privately-held companies and 10 percent increase following buyouts of private-equity-owned companies is likely an artifact of PE’s penchant for acquiring ‘add-on’ companies in order to grow, rather than growing organically via the expansion of employment in the original establishments of the company. The authors note the importance of acquisitions and divestments in driving employment dynamics in private equity buyouts of privately-held firms. 

The paper also shows wage declines following private equity buyouts and productivity gains. It is hard to know whether the productivity gains result from an increase in efficiency or an intensification of work and speed up following layoffs of workers. To the extent that productivity gains result from reallocating workers from less productive to more productive establishments, this raises questions about the rationale for private equity – that it takes over poorly performing companies and improves their operations.

All in all, a rather devastating analysis of the role private equity plays in the economy.

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