sells its stake. Further to this, if we look at an asset sale from the perspective of a classical economist, we can say that an economy would be closer to an optimal allocation of resources as a result of such a transaction. This is courtesy of the fact that the agent buying the asset would, by definition, value it more than the seller and would utilize it in such a way that they yield a higher output per unit input from the asset than its previous owners did. The firm that sold the asset (that may have become comparatively less productive over time as a business restructures) can then spend the money on an asset that is better tailored to the firm in question and one that would hence benefit the efficiency of their operations. This theory though, of course, relies heavily on the quality of information supplied to the market regarding an assets uses. The classic example here of asset stripping working to the benefit of both parties is when Permira bought Travelodge (which owned Little Chef) in 2003 for £712m. After only a couple of years Permira sold the Irish contingent of its hotels for £15m and raised £400m from the sale of 135 freehold properties to property entrepreneurs. It then sold Little Chef to another PE firm for £52m shortly before it ran into trouble. So, one would expect, using simple division, that when sold to Dubai International Capital, Travelodge was worth around £245m. It actually sold in 2006 for £675m and thanks to the leveraged nature of the buyout Permira made a profit of £450m over 3 years on this one project. I’m not going to generalize and assert that stripping assets is always a valid technique; only when it is done in good faith is this most likely to be true. This scenario though does highlight a mechanism that ensures many capital streamlining techniques benefit the wider economy too: The fact that an asset is sold means someone else values its service more than the target company and hence is able to put it to better use, thus increasing productivity, as explained above. The same applies for the usual batch of redundancies just after an acquisition; the workers are no longer needed by the firm as they have been replaced by technology or more efficient practices. Using the previous case study, under Permira’s management, Travelodge reduced the cleaning time for each room from 40 minutes to 25 minutes using a specially made DVD, subsequently allowing each hotel to reduce cleaning costs by 40%. Not only does this increase the target firms profits, but the workers no longer needed would be on the labour market looking for employment (potentially at lower wages than before v to increase their chances of being employed). Consequently, more firms can now benefit from cheaper labour as there is a larger pool of workers probably willing to work at a wage slightly less than that of employed workers. This may seem a rather crude assessment but one that would occur to the betterment of an economy in a totally free market, as Adam Smith proclaimed; ‘By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it’ 2 . I will now set upon trying to denounce the myth that GPs enter a target business, take a machine gun approach to the employment register, and then leave with a profit. It is often true that they leave with a profit but not for the cost cutting reason mentioned. Much research has been conducted in this controversial field, however, I shall use work commissioned by the National Bureau of Economic Research in the US as it uses, in my opinion, the most complete and well detailed data with respect to other reports of its kind. It uses data from 3,200 target firms and their 150,000 respective establishments over the period from 1980 to 2005. It concludes that ‘net job losses from target firms are less than 1% of initial employment’, furthermore it concluded that the sum of gross job losses and gross job gains over the period exceeded that of control firms by 13.5%. This figure represents an increase in job turnaround after a PE buyout, so whilst a there may be more redundancies there are also a large (but slightly lower) amount of new jobs being created to cushion the impact on society of the redundancies. Of the rise in position reallocations, the research suggested that 43% of them were a direct result of ‘a more rapid pace of employment adjustments’ 3 whilst the rest were credited to acquisitions and divestments (Picker, 2011).
Relating this to an issue raised in the introduction about Schumpeter’s theory of creative destruction,
2 http://www.econlib.org/library/Smith/smWN13.html 3 http://www.nber.org/digest/jan12/w17399.html
115
Made with FlippingBook - Online Brochure Maker