Private Equity: barons get billions and workers get
paycuts and layoffs
More and more employers around the world are
getting bought up and sold off by a new kind of firm that takes
pride in its lack of transparency, ability to rack up debt, and
skill at exploiting the tax code. Private equity firms, or
leveraged buyout firms, use investment money from university
endowments, wealthy individuals, and pension funds to buy public
companies and take them private, taking them off the stock market
and away from public scrutiny.
The volume of private equity deals has grown
600 percent in the last five years. In 2006, private equity funds
spent US$725 billion buying out companies. Now, they can
potentially mobilize more than US$2 trillion—enough to buy
McDonalds 38 times over.
In the United Kingdom, for example, one out of
five workers now works for a company that is owned by a private
equity fund.
These private equity companies have gained
huge power while avoiding public attention and accountability.
It’s time for that to change.
KKR, for example, is one of
the oldest and biggest private equity firms, and owns well-known
companies such as Toys “R” Us, Nielsen, and Alliance Boots.
KKR-owned companies operate from Beijing to Johannesburg,
South Africa, from Caracas to Bangkok. Through its portfolio
companies, KKR is effectively the second-largest private employer
based in the United States.
Bad decisions for workers,
communities, and consumers
Private equity firms can produce up to a 40
percent return on deals. They buy companies with the expressed
purpose of selling them again; making as much profit they can on
the purchase and the sale—and extracting value while they own them.
This can mean selling off assets or laying off workers. The buyout
firms focus on making money over a short time from the companies
they buy. This often leads to decisions that are bad for workers,
communities, and even consumers.
When a coalition of PE investors, including
KKR, took over German telecom company Tenovis in 2000, they
reportedly laid off 2,500 of the 8,000 workers—and forced some of
the remaining workers to accept a 12.5 percent paycut in exchange
for the right to keep working. KKR bought the company for
$400 million, and sold it for more than 50 percent more: $635
million.
After KKR and another PE consortium acquired
the Dutch company Nielsen, the company announced layoffs of nearly
one in 10 employees – and, according to financial statements, the
company froze its U.S. defined benefit pension plan so U.S.
employees stopped accruing benefits.
Huge fees—low taxes
Meanwhile, their CEOs extract huge fees from
deals. The personal fortune of Henry Kravis of KKR more than
doubled in one year—from $2.6 billion in 2006 to $5.5 billion in
2007. Much of the money that goes into the pockets of buyout
billionaires such as Henry Kravis is money that could be used by
the government to build roads and pay teachers—if it weren’t for
loopholes in the tax code. Private equity companies work by taking
out huge amounts of debt in order to buy companies. In the United
States and in many other countries, they can deduct their debt
servicing costs from their taxes. This means that companies that
previously paid significant taxes suddenly stop when they are
acquired by private equity. This costs the U.S. government billions
of dollars annually. Meanwhile, due to tax loopholes in the United
States and some other countries, individuals such as Kravis pay
lower tax rates on their huge profits than many teachers or nurses
pay. In some countries, such as the United Kingdom, Germany, and
Denmark, unions and other organizations have started working to
make sure that private equity companies pay their fair share.
What
can we do?
According to the Wall Street Journal, even
Wall Street’s leading legal minds say the buyout boom is being
fueled fundamentally by “executive greed.” More and more observers
are calling attention to the obscene wealth and the total lack of
transparency of private equity funds. The billionaires are
getting to make all decisions—and they’re shifting money into their
own bank accounts and away from the public good, workers, and
communities.
Unions, community organizations,
environmentalists, consumer groups, and others are coming together
to let private equity companies know that they can no longer escape
the scrutiny they deserve.
SEIU and our partners around the world are
calling on KKR and on the other private equity buyout billionaires
to adopt and put into practice the following basic principles:
- The buyout industry should play by the same
set of rules as everyone else.
- Workers should have a voice in the deals and
benefit from their outcome.
- Community stakeholders should have a voice in
the deals and benefit from their outcome.
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