Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) is known for buying companies and letting them operate just as they always have. You could fairly say its new partner in big buyouts, 3G Capital, operates differently.
In one of the largest transactions in recent history, Berkshire Hathaway and 3G Capital are buying Kraft (UNKNOWN:KRFT.DL), hoping to combine it with Heinz, a company the pair of investors took private in 2013. The deal is massive: Kraft has an equity value of just over $48 billion.
3G Capital hopes deep cost reductions can make the transaction worthwhile. The combined company, Kraft Heinz Co., expects to cut $1.5 billion in costs by 2017, including $500 million from refinancing high-cost debt. That would put operational cost savings at about $1 billion per year.
In other words, quite a few people at Kraft and Heinz will probably lose their jobs. That's not particularly surprising, though, given that 3G slashed a number of jobs at Heinz shortly after its buyout. Heinz recently reported having 24,500 employees, down from a pre-buyout headcount of 31,900.
Private equity's modus operandi
Private equity has been labeled a job killer -- an industry that exists to buy companies, run them with bare-bones staffing levels, and add piles of leverage on top just to eke out a few more percentage points of returns.
In the Heinz transaction, that's not far from reality. Heinz had an enterprise value of roughly $28 billion, which was financed with just over $8 billion in equity. Job cuts ultimately reduced staffing by 23%.
But looking at single deals and their short timelines gives us a distorted view of the private-equity industry as a whole.
One of the best and most comprehensive studies of buyout activity came from the halls of Harvard Business School. In a paper studying 3,200 target companies acquired from 1980 to 2005, researchers found that private equity did destroy jobs initially: employment fell by an average of 3% in the first two years after a buyout and 6% over five years.
But because target companies often create jobs in some businesses as they ax jobs in others, the net effect is that job losses are ultimately less than 1% of initial employment. If anything, private equity really likes to move people around, slashing jobs in legacy businesses to hire for new business lines within the same corporate entity.
So why do we think private equity is a job killer? Well, because the deals we see most often -- the big public-to-private transactions -- involve the largest cost-cutting components. "Employment shrinks by 10% of initial employment in the first two years after private equity buyouts of publicly traded firms," says the Harvard Business School study.
The barbarians may be at the gate, but put your pitchforks down. Across the entirety of the industry, private equity isn't the massive job-killer it is purported to be.