Learning from the Locusts: When corporate management starts acting like private equity
Workers are finding that even a failed private equity buyout bid has an impact on employment security, trade union rights and working conditions.
This appears to be the case in the Australian alcoholic beverage company Foster’s. Over the past year the company has attracted the attention of private equity buyout funds. Even though the buyout did not happen Foster’s executives are now claiming that they learned some lessons from private equity. The head of the company’s operations in Australia, Asia and the Pacific, Jamie Odell, said: "Private equity and the people in it have specific skill sets, particularly about taking cash out of the business and making hard decisions quickly....” (“Foster's avoids buy-out but learns lessons”, The Age, September 3, 2007.)
Taking cash out of the business is exactly what Foster’s management did - announcing a sudden A$350 million share buyback, while pushing an aggressive cost-cutting program.
The impact on unions is illustrated by the struggle for trade union rights at the Yatala brewery near Brisbane. Since July, Foster's has stubbornly refused to recognize and engage in negotiations with the Liquor, Hospitality and Miscellaneous Union (LHMU), the Australian Manufacturing Workers Union (AMWU) – both IUF affiliates - and the Electrical Trades Union (ETU), jointly representing a majority of Yatala workers. (Click here to read about the campaign.)
Last year when Australia’s largest retail chain Coles Myer faced a hostile takeover bid by a KKR-led consortium, The Financial Times (22 September 2006) reported that: “Coles Myer, the Australian retailer, yesterday bolstered its defence against a A$17.3 billion (US$13 billion) takeover attempt by private equity firms by pledging accelerated earnings improvements from new cost savings, including 2,500 job cuts.”
The key word here is “pledge”: a promise to shareholders that if they reject the private equity offer then cost-cutting and restructuring will be used to generate increased cash flow back to shareholders. This cost-cutting and restructuring was not planned before the buyout bid, but was a response to the attempted takeover.
A similar pledge was made when the Australian national airline Qantas successfully fended off a hostile takeover bid by a private equity consortium involving Macquarie Bank and TPG earlier this year. Shortly after the bid failed Qantas management announced a A$1 billion share buyback, equivalent to 10% of the company’s market value.
The link with share buybacks is important for understanding the impact that failed buyout bids have on workers. Faced with a hostile takeover, management must convince shareholders not to accept the offer made by private equity funds to buy all of the company’s shares and “take it private” (off the stock market).
In some cases companies convince shareholders to adopt “defence” mechanisms or so-called “poison pills”. This includes changes to shareholder voting rights; issuing more shares; etc. There has been a surge in the adoption of defence mechanisms by companies in Japan in the face of hostile buyout bids, and more than 250 major corporations now have defence advisers on standby - up from just 25 companies two years ago.
Recently both the brewer Sapporo and the sauce manufacturer Bull Dog successfully defeated hostile takeover bids by Japan Strategic Fund - a private equity fund registered in the Cayman Islands tax haven and managed by the New York-based firm Steel Partners. Management convinced shareholders to adopt defence mechanisms that prevented a takeover by Steel Partners. But then shareholders began agitating for their reward.
So even if the buyout bid fails it still has an impact. When management succeeds in getting shareholders to either reject the offer and/or to adopt a defense mechanism, then institutional shareholders want to be rewarded. They want a massive transfer of cash through higher dividends or share buybacks to make up for what they “lost” in not accepting the buyout bid. The result is that companies that successfully defend against buyout bids still end up imposing cost-cutting and restructuring. Financial resources that should be used for future productive investment and expansion ends up in the hands of shareholders instead.
What are the implications?
Clearly unions need to keep fighting private equity buyouts on a company by company basis. But they must also become involved in a broader political intervention demand the re-regulation of financial markets, strengthening of corporation laws (especially on transparency and debt levels), and new restrictions on the activities of private equity buyout funds. Without such regulations, even failed buyout bids will have an impact on workers’ rights and employment security.