I can recall watching a Tarzan film in which the great man is tied down on a beach. Eventually the rising water will bring a shoal of piranhas to inflict a particularly hideous death. It must feel a little like that being an FD.

You are aware that all around you is a rising tide of global cash liquidity that could burst in at any moment in the form of a private equity takeover offer.

Back in the 1980s it seemed relatively straightforward. Private equity – or leveraged buyout as it was then – was the tool for sorting out companies languishing under disinterested management.

But now private equity funds have found it so easy to raise investment in this era of low inflation and low interest rates that they have turned their eye towards companies that have already completed a turnaround.

Sainsbury’s is well on the road to recovery and health group Alliance Boots is only just starting to reap the benefits of its merger. These two deals have a current aggregate price of almost £20bn.

It is breathtaking that a small group of financiers could use debt leverage to launch buyouts on such a scale.

Trade union anger at the fallout from the purchase of motoring organisation the AA from Centrica by private equity firms Permira and CVC has catapulted the issue on to the front page and into the House of Commons. The outcome is a government review of the tax liability of private equity firms.

However, the fact that US private equity group KKR emerged as a potential bidder for Alliance Boots weeks after the GMB grabbed headlines by bringing a camel to protest at Permira head Damon Buffini on his way to church – think of the parable of the rich man and the camel passing through the eye of a needle- – shows demand is still overwhelming.

So what does it mean if private equity comes knocking at your door? There have been claims that it puts workers under pressure and delivers huge profits to investors, and counterclaims that it creates jobs and sculpts more efficient companies. The truth is perhaps somewhere in between.

I would offer five lessons to FDs who find themselves in the eye of the storm. The first is that private equity firms cut jobs and cap wage growth in the aftermath of a takeover.
This means, inevitably, there will be growing pressure on private equity-owned firms to provide financial assistance to redundant workers. Management buyout companies add jobs over the long-term.

Second, wage growth is modest in the first year but grows rapidly through to the sixth year after a buyout due to increased productivity under new ownership. This is worth considering when compiling budgets.

Third, the rewards can be vast – depending of course on which chair you are sitting in. The biggest rewards are for those running the private equity firms and realistic estimates put the sky as the limit on those returns.

The problem, and this is the fourth lesson, is that the existing management would stand to gain a small fortune if they were kept on, which lands them with a conflict of interest.

Their duty as directors is to maximise value for shareholders, which would probably involve putting up some resistance. That will not be popular with the private equity bidder and could jeopardise their position if it wins.

The last and most prosaic lesson is that any takeover offer may fail through shareholder resistance, regulatory problems or political pressure – if you’re big enough. So during this entire maelstrom, FDs have to carry on running their day-to-day business.

Tags: fds, private equity, government, sainsbury, alliance boots, cwc, kkr, gmb, leveraged buyout, centrica, permira,

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