Executive summary - Udo Bullmann

In particular, incumbent managers of listed companies are expected to be increasinglyconcerned, if not obsessed, by the short run share price: a high share price is the best deterrent toa hostile takeover. A depressed share price – for whatever reason – will quickly attract theinterest of capital funds looking for quick profits. This is likely to have a series of negativeconsequences. Large-scale investment projects, particularly those with a long payback periodmay be cancelled or postponed, as managerial planning horizons collapse to the demands ofquarterly reporting deadlines and their priorities focus on the latest fad that, for a short period, isat the top of the likes or dislikes list of ‘the market’. In particular, jobs may be axed to offerinvestors some ‘good news’. Dividends are likely to be pushed up at the expense of realinvestment and the company’s human capital. Some firms engage in macroeconomicallyirrational share buyback schemes. Others rush into mergers and takeovers that lack a genuineeconomic rationale merely to avoid an unwelcome takeover bid or speculative interest.Ultimately managers are forced into Enron-style false accounting. More generally the pressure onother stakeholders, and especially workers, as described in section 2, is likely to be ratcheted up.1.2 Growth and financingA 2005 study by PricewaterhouseCoopers (PwC), commissioned by the German organisationBVK, attempts to document the allegedly positive effects of the growth of private equityinvestments with figures from the companies they interviewed: over a five-year period from 2000to 2004, the average turnover of German target enterprises grew by approximately 10 per centwith PE funds. The average growth of the German gross domestic product was only 1.6 per centin this period. Moreover, the average growth in turnover of all German companies in the sameperiod amounted to a mere 0.1 per cent. But on closer examination this illustration appearsproblematic. Numerous factors influence the gross domestic product and these do not make for asensible comparison with LBO target enterprises.There simply limits to what you can compare!Even a comparison with all German companiesis problematic. LBO funds deliberately selecttarget enterprises that already promise successwithout their help and which are thereforealready way above average. The turnover ofthese companies would have grown substantiallyas a rule without any influence from LBOs.In the case study of DT Group it is described how thenumber of employees has increased with 10% since thetake over. However this is due to acquisitions offormerly privately owed building markets. Directinvestment in property and equipment is lower thanbefore the take over.Here, too, the specific contribution of PE funds cannot really be proved - and one certain effect ofLBO-operations is that internal debt in the targeted companies is heavily increased and the futureinvestment capability correspondingly deteriorates.Yet, even if it is assumed that the involvement of private equity investors - in some cases - canactually improve the efficiency of a business by breaking the managerial decision-making andsupervisory monopoly, this statement frequently does not tell the whole story. In many instances,costs are not ultimately reduced but are merely offloaded by the company onto a third party. Thismeans that, although the enterprise saves on labour costs by cutting jobs, it is not automaticallystrengthening the company’s dynamics, qualifications and motivations. And it is effectivelyburdening society with the cost of the unemployment it creates.Small and medium-sized enterprises are caught in a dilemma. Because of the tightercreditworthiness requirements to be imposed on companies by the new rules on capital adequacy