Workers Ride Rough Merger Wave
Experts worry about the effect takeovers have on workers, but studies show short-term benefits. EMPLOYMENT: LEVERAGED BUYOUTS
PITTSBURGH — AMERICAN workers are surfing precariously on a wave of takeover mania. This is the fourth such merger wave in the past 100 years. After the first three, workers landed, with varying degrees of impact, on a craggy shore of stock market crash, recession, or both.
Will they land more softly this time?
History says no. But the current conventional wisdom and some new academic studies suggest that maybe they can.
Just like the previous three merger periods, the takeovers and leveraged buyouts of the 1980s are controversial. Leveraged buyouts, or LBOs, involve companies, management groups, and corporate raiders taking out huge loans to buy big corporations.
Supporters say LBOs make United States companies more competitive by forcing managers to be extremely efficient.
Critics worry about the huge piles of corporate debt that are accumulating, the big profits reaped by a few investors, and the impact of all this on workers. AFL-CIO president Lane Kirkland estimates that mergers, acquisitions, and LBOs during the 1980s have pushed 90,000 union members out of jobs. According to a recent Industry Week survey of 800 managers involved in a takeover or LBO, two-thirds thought it had had a negative impact on employee morale.
So do LBOs help or hurt?
``It's a varied experience,'' says Sandra Shaber, an economist at the Futures Group, a consulting firm in Washington, D.C. In some cases, ``the company in fact does get leaner and meaner. In other cases, the emphasis of the short term over the long term demoralizes the workers.''
Most of the LBOs fall somewhere between these extremes. Recent studies have found that the typical LBO:
Boosts employment slightly. Of 42 companies involved in LBOs between 1980 and 1986, the average gain in employment was 4.9 percent six months to two years after the restructuring, according to a study by the University of Chicago's Steven Kaplan.
Helps blue-collar employees but hurts managers. Two years after an LBO, wages for the typical manufacturing worker increased 3.7 percent more than wages in the non-LBO plant; pay for the typical nonproduction worker or manager grew 5.2 percent slower than in the non-LBO plant. These figures come from a newly published study of 1,100 manufacturing plants by Frank Lichtenberg, a research fellow at the Jerome Levy Economics Institute at Bard College.
Seems to raise productivity. Mr. Lichtenberg also found that manufacturing plants involved in LBOs more than doubled their efficiency advantage over other plants in the same industry: from 1.2 percent two years before the buyout to 2.9 percent two years after the buyout. When management took over company ownership (as opposed to a corporate raider, for example), the gain was even higher: from a 3.6 percent advantage before the LBO to 7.5 percent afterward.
Recent studies of ESOPs (Employee Stock Ownership Plans) across a broader spectrum of the economy reinforce the trend. ESOPs are specialized takeovers in which the employees, instead of managers alone, own a large share of the company. Overall, ESOPs tend to boost productivity at a firm, but only slightly, says Jan Svejnar, a University of Pittsburgh economist and coauthor of a 1987 study on ESOPs.
Other studies suggest the key to productivity growth may not be the ESOP but its combination with real employee-involvement programs. A 1987 analysis by the General Accounting Office found that ESOPs where nonmanagerial employees participated in decisionmaking had a productivity growth rate 52 percent higher than ESOPs without worker say.
Giving workers a share of the company may in fact lead to giving them a bigger say in how the company is run, says Joseph Blasi of the Institute of Management and Labor Relations at Rutgers University. The benefit from these takeovers is that, if properly structured, they give ownership and control of the company to the same people, he says. And managers and workers will perform better if they have a stake in their work and the power to improve it.
This short-term view of LBOs can't predict the longer-term implications, these researchers concede. But most analysts aren't too concerned about the rising corporate debt. The US corporate debt level is still below that of other industrialized countries. LBOs tend to be concentrated in mature, noncyclical industries (such as food processing) where sales hold up well even during a recession. And, these analysts say, individual shareholders are the best people to determine the value of these reconfigured companies.
Richard Du Boff, a Bryn Mawr College economics professor and coauthor of an article on the merger waves, disagrees.
Speculation ran rampant during the previous merger periods in the US: 1897-1902, 1917-29, and 1955-69, he says. And only the big players - the brokers, bankers, promoters, and company insiders - reaped big profits from the trend.
``There is little reason to think that, when the long-run returns on the megamergers of the 1980s come in, they will be essentially different from those for earlier mergers,'' he writes. The economists of the day justified those waves of change, too. Yet each of them ended in either recession or a stock market collapse, he adds.