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Union concerns over private equity are growing worldwide. Their demand for action to tame private equity activity has been taken to G8 host Angela Merkel.



It is not just because mergers and acquisitions are running at an all-time high, with every single publicly quoted company now at risk of a leveraged buyout. In fact, they all exist in a fevered pre-bid environment. The takeover rumour mill is at full velocity. Trading is frantic. This is nothing to do with long-term commitment.



Union complaints about private equity are resonating with business, politicians and the public at large. Private equity has a case to answer on a number of grounds: short-termism, tax avoidance, value gouging, lack of transparency in company takeovers, ethical concerns over MBOs and illegal insider trading. On the latter, Bloomberg has found that options’ trading jumped 221% in the three days prior to the US’s 17 largest takeovers. Another study showed that insiders might have traded illegally before 41% of the largest US acquisitions in 2006.



Periods of intensive M&A activity are always difficult for company employees. The inevitable restructuring increases job losses. Although most displaced workers find new jobs in an expanding economy, they are often less well paid.



In this round of M&As, the risks facing workers are heightened by the unprecedented role being played by private equity buyouts and hedge funds.



In value, private equity M&A deals accounted for more than 20% of global M&A activity in 2006.



And hedge funds, which now have more than two trillion dollars under management, are intervening in M&As as well. See TCI’s leading role in the ongoing ABN AMRO saga.



Minority shareholdings are a Trojan horse, destabilising companies and workforces.



PE buyouts and hedge funds are spurring on the M&A boom and edging out strategic, industry-based investors. Trade unions fear this may increase the risk of M&As failing in the longer term.



Recently, the media widely reported the results of a study of private equity acquisitions in the UK, showing that the deals tended to cut jobs in the first year after acquisition but generally resulted in higher employment later on.



But closer analysis of the data by the Work Foundation found that as many as 36% of the companies surveyed still had lower levels of employment after six years. And across all the companies, wages had generally increased more slowly than in the economy as a whole.



Also, hostility towards trade unions was more pronounced in PE-controlled companies, with a “yawning information and consultation gap”. PE firms and hedge funds are known for their lack of transparency towards stakeholders and the broader public. Notions of social responsibility are absent from private equity activity.



Others have spoken of an unfair sharing of risk and, on the other hand, reward and costs. PE investors and top company managers take heavy risks, but it is their own choice and they often reap rich rewards.



The employees of a target company have the risk imposed on them. They share the costs in the event of failure. But in the event of success, they can expect at best maintenance of the status quo; at worst, a loss of their jobs; nearly always, pressure on their pay and working conditions. Today we have the first strike at Deutsche Telekom. Blackstone has a 5% stake and used this as a platform to slash working conditions.



Unions are looking for a fairer sharing of risk and reward. There are signs that some PE firms feel that they too can benefit from greater openness and dialogue. They could point to certain advantages of PE. For example, a longer-term perspective than many PLCs’ obsession with quarterly earnings.



Private equity acquisitions load debt on the acquired company’s balance sheet. But debt hurts investment and makes a company more vulnerable to any decline in revenue. Too often we have seen debt increase to pay fees and dividends to private equity.



There are also broader macroeconomic concerns, now that signs of excess are multiplying. What would happen to employment levels if the irrational exuberance of the alternative investment boom were to give way to a period of irrational fear?



At the end of the day, the private equity model is about short termism. The 2/20 model of fees and returns to be made in 4 years is in contradiction with a planet that requires long-term sustainable development.



We look to the G8 to lead a global push to tame this out of control financial behemoth.