The Government Needs to Learn the Lessons of Private Equity, Fast.
Rewind almost three years and the trade union movement was embroiled in a bitter media spat with the private equity industry. In a portent of something much bigger, private equity firms were accused of playing fast and loose with high levels of debt to buy up companies they neither understood nor cared for in order to make a quick buck.
Trade unions are used to being patronised and dismissed. There have always been countless armchair policy-makers with an infinitely greater understanding of the real world (most of them have their own blog these days). But the ridicule aimed at the unions in the Summer of 2007 was often intense.
It reached its nadir when the Chair of the All Party Private Equity Group, Sion Simon, went Paxo on the TUC General Secretary at a hearing of the Treasury Select Committee. Simon asked Brendan Barber six times in quick and testy succession to produce the evidence that private equity firms increased risk for the companies they acquired.
Well, the evidence is now here. As Ian Griffiths and Nick Mathiason report in The Guardian today no less than four planned flotations by private equity firms have been abandoned in the last two weeks. The reason: investors are now scared off (rather than seduced as they once were) by the debt-driven private equity business model. This is deeply worrying. The future of companies owned by private equity firms unable to raise enough cash to meet massive debt repayments is very uncertain. The possibility of fire sales or major restructuring become increasingly likely with all that can mean to the continued employment and conditions of those working in the firms.
Big mistakes were made in the early days of debt mania when the Government did all it could to lure the private equity boys to London by offering the most favourable tax and regulatory regime possible. When it became clear in 2007 of the risks involved, mistakes were made again when a limited voluntary code was introduced which did little more than improve reporting in the industry.
But the Government now has a chance to partly put right what it did wrong back then.
The Kraft takeover of Cadbury has shown that the large leveraged buyout is far from dead. Indeed we may be about to see yet another round of frantic mergers and acquisitions. As Brendan explains, Gordon Brown and Peter Mandelson need to seize this moment to radically change the way firms are bought and sold in the UK.
Extra disclosure and consultation with the workforce is good, changing rules to limit the most speculative shareholders voting on an acquisition might help. But the real redemption will only come by accepting that we need an objective, dispassionate body to judge whether a takeover is really in the long term interests of the company being purchased and of the people who work there.
The sad truth is that shareholders, even the longest term investors, will always sell if the price is high enough. Company boards, who often stand to benefit financially to the tune of millions, will also recommend a sale at the right price. No voluntary mechanism, no extra disclosure, no tweaking of share voting regulations will change this fact. In the end, only a mergers and acquisitions commission can make the objective judgement about the benefits of a takeover.
This may not help the thousands of workers now facing uncertainty as a result of private equity irresponsibility but it will, at least, stop many thousands more finding themselves in the same position in the future.