Creative destruction? Evidence that private equity firms cut jobs to raise returns

Building on the work of Cressy, Munari, and Malipiero (2007a) which showed that buyouts have higher operating profitability in the post-buyout period than matched companies, the paper examines contradictory popular claims that private equity (PE)-backed leveraged buyouts (LBOs) generate or destroy jobs as a result of the process of 'rationalisation'. Using a sample of up to 57 UK whole-company buyouts and a matched sample of up to 83 controls over the period 1995-2000 we run loglinear employment regressions for one to five years after the buyout with buyout year variables as regressors. A PE dummy represents companies that have PE backing while other variables control for initial employment, gearing, investee size and profitability together with industry and macro effects. We find that there is no PE-'choice' effect: in the buyout year there are no significant differences between buyout companies and controls in terms of employment. But in the post-buyout regressions the PE dummy is highly significant and negative reaching a peak of 23% per annum after four years. So to achieve efficiency gains, buyouts bring about quick and substantial reductions in employment in target companies during the initial period of 'rationalisation'. However, initial profitability, three-year average post-buyout profitability and three-year sales growth have positive elasticities with respect to future employment suggesting that buyouts, by generating higher operating profits from job cuts, may ultimately be associated with compensating job creation. This, however, is the subject for future research.