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Private equity

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From: The Socialist issue 479, 22 March 2007: Labour's NHS plans: not what the doctors ordered!

Search site for keywords: Private equity - Market - Capitalism - capitalism - Hedge funds - Economy - Global - Labour - Trade unions


Private equity deals - fight free-market vultures

THERE IS a frenzy of takeovers by private equity firms, part of a world-wide surge of company mergers and takeovers by banks, hedge funds and big corporations. It is linked to a global orgy of financial speculation, fuelled by a ready supply of cheap credit. Last year, private equity buy-outs in Europe totalled 117.5 billion, 40% up on 2005.

In Britain, the buy-out vultures are currently hovering over an array of major companies: Sainsbury's supermarkets, Allied Boots chemists, Unilever, Cadbury Schweppes, and others. This casts a dark shadow over the jobs and wage-levels of tens of thousands of workers.

Like many predators, private equity firms skulk in the undergrowth. As private partnerships, they are not compelled to reveal much about their finances, unlike public companies quoted on the stock exchange. Hardly household names before, the big players, most of them US-based, are now hitting the headlines: Blackstone (who own Madame Tussauds), Kohlberg Kravis Roberts (KKR), Appollo Management, Texas Pacific, Altria and so on. Many of their bosses appear high up on Forbes magazine's global list of 946 dollar billionaires.

Their tactic is to target "under-valued" companies, often large conglomerates. Borrowing vast sums at cheap interest rates, they buy out shareholders (often at generous prices), subsequently taking the target company private. To "maximise the value" (their potential profit), the new owners "modernise", often breaking their acquisition into segments and cutting costs, especially jobs and wages.

The debt used to finance the operation, together with huge management fees, is then dumped on the target company. They take full advantage of tax relief on their interest payments. If all goes well, the private equity firm later re-floats its acquisition on the stock exchange, raking in a huge profit. In recent years this type of buy-out has been twice as profitable as investing on the stock exchange.

Trade unions are quite rightly protesting about the predatory activities of the private equity sharks. Tony Woodley, of the Transport Workers, and other union leaders are calling on the government to enforce greater public scrutiny of take-over deals. They also want an end to the generous tax treatment. All that Treasury minister Ed Balls would say, however, is that the government would ensure "commercial decisions are taken on a level playing field."

New Labour is hardly hostile to the speculators. They have adopted a hands-off attitude to private equity and hedge funds, turning London into the buy-out capital of the world.

Labour peer Lord Hollick is an adviser to KKR, one of the firms sizing up Boots and Sainsbury's. Labour Party chair, Hazel Blears, defends the private equity bosses, some of whom have made donations to Labour: "In many instances enterprising people, through private equity and other means, have been able to go to companies which are failing, turn them around, secure jobs, make sure the pensions can be secured."

How reassuring will this be to workers who hear that the proposed buy-out of Alliance Boots, the high street chemist, by Stefano Pessina, in cahoots with private equity shark KKR, will lead to the closure of up to 150 high street stores? They may have heard, too, that Nelson Peltz, who runs a hedge fund (a private speculators' club) is attempting to take over Cadbury Schweppes. After Peltz recently took over H J Heinz, he closed 15 factories with the loss of 2,700 jobs - rewarding shareholders with a bonus dividend.

Trade union campaigns

TRADE UNIONS from Britain have joined unions from 15 countries, spanning the US and Europe, in a move to combat the 'cancer' of private equity and hedge funds. They are calling for international rules to force the 'locusts' to pay more tax, to disclose their finances, and to recognise workers' rights.

Such measures, though limited, would be a step forward. But the union leaders are taking a completely wrong route. They are calling for an international task force that would include such bodies as the OECD (Organisation for Economic Cooperation and Development), the IMF (International Monetary Fund) and the central bankers' Financial Stability Forum. But these are the very bodies that, backed by the power of US capitalism, helped impose an anti-working-class, ultra-free-market regime on the whole global economy.

No doubt, private equity buy-out sharks and the high-rolling hedge fund speculators are some of the most vicious operators in the global market. But they are a symptom of unfettered, free-market capitalism, which inevitably breeds ruthless, profit-hungry predators. Complaining about the predators while accepting the free-for-all environment that feeds them will not safeguard workers' interests.

The only way to effectively defend jobs, pay and rights is through strong trade-union organisation and action, starting from workplace level and extending across national frontiers. Workers should demand that private equity firms and hedge funds, as well as their targets, open their books and reveal the true state of their assets, sales and profitability.

Members of the GMB union recently showed the way, taking action against their treatment by private equity group 3i, which took over National Car Parks (and is already selling on NCP to an Australian bank). NCP workers in Enfield, North London, organised five days of strikes and demonstrated outside a private equity conference in Frankfurt, forcing 3i to recognise their union.

Ultimately, the only effective way for workers to protect jobs and conditions in the event of a take-over is by taking strike action, appealing to other sections of workers for support and solidarity action. A tremendous example was shown last week by 40,000 Airbus workers, who took strike action and organised mass demonstrations in Germany, France, Britain and Spain against the threat of 8,700 job cuts by the European aircraft consortium.

Defensive action against buy-out predators in the unfavourable environment of ultra-free-market capitalism, however, raises the question of an alternative. Recently, William Keegan, the Observer's economic commentator, praised a "reasoned ...reaction to the excesses of modern unfettered capitalism."

But "unfettered" capitalism, based on extreme free-market policies and globalisation, is the capitalism of our time. There will be no return to the softer, social-market, welfare-state capitalism of the 1960s and 1970s. And globalised capitalism cannot be "managed" to meet the needs of workers.

For the working class, a better life for all depends on a viable alternative to the present rotten system. The outlook for humankind would be very bleak if capitalism, based on profit-greed and market anarchy, were the only way of running society. Economic planning and democratic management on a national and international basis are the key to the balanced use of resources, protection of the environment and to meeting the real needs of the majority. This means socialism.


WHERE TO begin? When huge companies are faced with predatory buy-outs, threatening job losses and economic blight for whole areas, the workers' organisations should fight for them to be taken into public ownership.

This would not be a return to the old, bureaucratic nationalised industries of the past, let alone the Stalinist economy of the former Soviet Union. Run under democratic workers' control and management, threatened firms would then serve the needs of workers and society. It would be a step towards a socialist planned economy.

The take-over frenzy, involving private equity and hedge funds, is typical of the last phase of a business cycle. Now, the dominant US economy is slowing down, and the world economy will follow. Corporate profits will fall and many debt-laden speculators will over-reach themselves.

The OECD, IMF, and other financial policing bodies are not worried about the plight of workers. But they do fear one or several private equity companies could crash, threatening a meltdown of the global financial system. "If just one of these big ventures goes down," says one City analyst, "funding for private equity will dry up overnight. At that point, the party ends."

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