The use of private equity provides a lifeline for
business during recessions where other forms of equity and debt financing prove
to be scarce. This paper seeks evaluate the impact of equity on small
businesses during recessions and makes use of a case study of Porsche to
demonstrate these impacts. The paper also gives an analysis of previous
scholarly writings on private equity and its impact on businesses in order to
create understanding of the topic in question. The study also outlines the
research methodology that shall be used in achieving the set objectives as well
as the data analysis and presentations to be used in presentation of the final
report
Porsche Automobile Holding SE was formed as a
holding company in 2007 and it controls 50.1% of Porsche Zwischenholding GmbH
which in turn controls 50.7% of Volkswagen AG and 100% Porsche AG (Porsche SE,
2011). The subsidiaries mainly specialize in production of quality automobiles
as well as the production of auto parts. Porsche Automobile Holding SE is based in
Stuttgart. The symbol SE refers to Societas Europaea which means that the company was
transformed into a European Company (Porsche SE, 2011). This transformation was conducted
to enhance its efficiency in implementing its growth programs. The
transformation also facilitated the establishment of a supervisory board that
would ensure sufficient monitoring of the management teams. Like other
businesses, Porsche is affected by the macroeconomic environmental that may
inhibit or enhance their business performance. These factors may from time to
time require that additional finances be raised in order to adjust in a manner
that sustains competitiveness and ensures survival. The most common forms of
financing include private equity and debt financing. This paper shall focus on private
equity and shall evaluate its impact on small businesses during a recession. To
illustrate these impacts, the paper shall use the case study of Porsche
Automobile Holding SE.
The research title shall read as follows: The Impact of Private Equity on
small family businesses during recession: a case study of Porsche Automobile
Holding SE.
In determining the impact of private equity on small
businesses during recession, the study shall seek to create understanding on
the challenges faced by businesses during recessions and opportunities thereof
that necessitate the sourcing of financing. The study shall also expound on the
characteristics of private equity with the aim of enhancing insight into
possible impacts that it can have on the businesses. The research shall then
focus on the case study analysis of Porsche Automobile Holding SE with the aim of demonstrating
the impact of private equity on small businesses. The study shall therefore
seek to answer the following questions:
·
What is private equity
and what applications does it have in businesses
·
What impact does
private equity have on firms across the industry
·
How has private equity
impacted on the structure, performance and general aspects of Porsche Automobile Holding SE
Literature Review
Private equity involves capital raised from private
sources of individual assets. These may include their savings, or proceeds from
personal assets owned by these individuals (Cuny and Talmor, 2007). Private
equity is mainly used in expansion of operations, acquisitions, takeovers and
other strategic business moves such as product innovation to suit changing
market needs (Private Equity Growth Capital Council, 2011). The use of private
equity in financing business expansion and new ventures has been cited as the
most viable option for businesses operating in economies undergoing a
recession. The poor performance of the stock markets makes it difficult for
businesses to source for funds from the public. Similarly, the level of
uncertainty in the markets makes the banks and other financial institutions to
be hesitant in offering debt financing (Berger, Klapper, and Udell, 2001). This
uncertainty stems from information asymmetry and high agency costs. The
businesses are then left only one other viable option of sourcing for finances-
private equity. The investors providing this private equity are often better
placed than financial institutions to counter the levels uncertainty involved
due to their ability to closely monitor the running of the businesses as well
as their ability to influence the decision making processes of the management
teams through the board of directors (Morgan, 2007). According to some
scholars, private equity leads to a generation of higher levels of efficiency
in the companies being invested in (Kaplan, 1989). This has in the past been
attributed to the perceived value-adding capacities of many private equity
investors.
However, critics have opposed this view stating that
the good performance is often just as a result of investors identifying
organizations that already possess the skills and ability to perform well in
the market using their superior intelligence networks that enable them to
accurately predict the future movement of industries (Maherault, 2004). According
to Jensen and Meckling (1976), the resultant tight control by the investors
reduces the agency costs as the managers lose the some measure of autonomy that
would normally be abused in a bid to meet their own interests. The new structures also often result in
performance based incentive schemes that motivate managers to improve the
efficiency of companies in order to improve on the organizations’ performance
levels. The incentive may include cash rewards or company stocks that transform
these managers into owners of the companies (Leslie and Oyer, 2009). Another
critical aspect of private equity is its impact on employment. Researchers have
shown that most of private equity investments are always accompanied by
structural changes in the targeted organizations and this does lead to a
certain degree of loss of jobs (Barney, 1991). However, research has shown that
most of these firms subsequently grow within three or four years raising the
employment levels beyond the pre-investment levels (Berger and Udell, 1998). Scholars
have also been critical on whether the use of private equity leads to a
transfer of wealth from tax payers as a result of higher tax shields generated
by the higher leverage levels typical of private equity financing scenarios
(Thomas and Masulis, 2009). The question of financial distress levels also come
into play as it is a function of the level of leverage in a company and is
bound to get affected by the injection of private equity (Whited and Wu, 2006).
Researchers have shown that the level of financial distress in companies that
have been invested in tends to rise immediately after the investment although
the levels of distress generally average at lower than other comparable
businesses within a span of three years (Zmijewski, 1984).
The injection of new private equity also acts as a
catalyst for the transfer of wealth from the debtors to the business owners.
The value of debt decreases with the engagement of the company in ventures that
that are riskier than earlier envisaged by the bondholders. The equity
investors often advocate for engagement in projects whose success they can
reasonably predict. However, these ventures are viewed as risky by other
stakeholders due to the asymmetry of information between them and the
investors. In the case of acquisitions, the existence of recession allows
businesses to acquire strategic organizations at discounted values (Kaplan and
Stromberg, 2009). Harsh market conditions often leave firms in compromising
situations that could easily lead to their closure. The option of allowing in
private equity investors to save the organization in exchange for a substantial
level of ownership becomes the best available option. These firms are normally
greatly undervalued at the points of these transactions. In the face of scarce
credit, firms are forced to turn to private equity investors to ensure
survival. The investors may also be corporate organizations that may be
operating in the same industry and who may opt to take advantage of the
opportunity to consolidate their market base in the economy. The undervaluation
that is normally associated with recessions often leaves the target firms
vulnerable to major ownership restructuring where the acquiring organizations
in many cases acquire the majority shares, leaving the current owners voiceless
in a firm they founded (Bargeron, Schlingemann, Stulz, and Zutter, 2008).
This study shall make use of both primary and
secondary research. Secondary research shall be concentrated on evaluating
general characteristics and impacts of private equity on small business during
recession as well as gathering useful data needed for analyzing the case study.
The use of primary data shall mainly be focused on the case study where members
of the target organization shall be requested to provide information through
oral interviews and written questionnaires.
The population will be employees at Porsche. The
study shall focus on interviewing five respondents from these employees. The
sampling method shall be judgmental. This is due to the fact that the some of
the information to be sought after may only be known to just a certain segment
of the population (Gray, 2004). The study shall pick targeted respondents from
members of senior management who have worked with the company for a period of
not less than ten years. This length of experience will enable them shed light
on any transformational processes the organization may have gone through with
remarkable precision.
The primary data collection shall be through
interviews and where necessary, through questionnaires. The questionnaires
shall be designed and availed to the respondents prior to the interview. This
will enable the respondent to reflect on the tasking aspects of the interview
hence ensuring higher chances of obtaining accurate and reliable information.
Care shall be taken to ensure that interview schedules conform to the timings
and settings of the respondents as much as possible. This will help enhance the
level of cooperation and subsequently the quality of information they shall
offer. Secondary data shall mainly be obtained from recent journals and
industry reports that provide information and evidence relating to the research
topic. These shall be synthesized in order to be compatible with the objectives
of this study.
The data analysis shall mainly be qualitative. Most
of the findings are likely to prove or disprove existing theories on the
subject matter. Quantitative analysis shall be used to measure performance
levels, efficiency levels, growth of revenues and employment and other aspects
necessary to illustrate what impact private equity has on small businesses.
The target respondents are senior management level
employees who are by nature extremely busy individuals. This may get in the way
of their availability for these interviews. The researcher shall ensure that
there is timely communication and shall indicate a level of flexibility to
allow the respondent to alter the time and venue of the interview in order to
ensure the interview takes place at a time when the respondents are not
distracted or in a hurry to get to something else. Insufficient secondary data
may also undermine the findings of this study. These insufficiencies where not
surmountable shall be noted and shall be incorporated into recommendations for
further research.
The research shall require a period of 8 weeks to
carry it out. The main resources required will be finances, journals, reliable
publications and the Internet
The most common ethical issue raised in research
involves protection of the anonymity of the respondents (Kerlinger and Howard,
1999). Unless where expressly allowed, anonymity of the respondents shall be
respected. Confidentiality of information also causes great concern to
respondents (Neuman, 2006). Any confidential information collected in the
course of the data collection shall also be exempt from inclusion in the
report. Coercion into offering information by a researcher is also considered
grossly unethical (Patten, 2004). The researcher shall also refrain from
coercing the respondents into providing information. The right of the
respondents to abstain from answering any of the questions in the questionnaire
shall be respected.
Bargeron,
L.L., Schlingemann, F.P., Stulz, R.M., Zutter, C.J., 2008. Why do private
acquirers pay so little compared to public acquirers? Journal of Financial
Economics, 89(3), pp. 375-390
Barney,
J.B., 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, pp. 99-120
Berger,
A.N., Klapper, L.F., Udell, G.F., 2001, The ability of banks to lend to
informational opaque small businesses, Journal
of Banking and Finance, 25, pp. 2127–2167
Berger,
A.N., Udell, G.F., 1998. The economics of small business finance: the role of
private equity and debt markets in the financial growth cycle, Journal of Banking and Finance, 22,
pp. 613–674
Cuny,
C.J., Talmor, E., 2007. A theory of private equity turnarounds. Journal of
Corporate Finance, 13(4), pp. 629-646
Gray,
D.E., 2004. Doing research in the real world. London, UK: Sage
Publications.
Jensen,
M., Meckling, W., 1976. Theory of the firm: Managerial behavior, agency cost,
and ownership structure. Journal of
financial Economics, 3 (4), pp. 305-360
Kaplan,
S., 1989. The effects of management buyouts on operating performance and value.
Journal of Financial Economics, 24(2), pp. 217-254
Kaplan,
S.N., Stromberg, P., 2009. Leveraged
buyouts and private equity. Journal of Economic Perspectives, 23(1), pp.
121-146
Kerlinger, F.N.,
Howard B.L., 1999. Foundations of behavioral research. 4th ed. Belmont,
CA: Wadsworth.
Leslie,
P., Oyer, P., 2009. Managerial incentives and value creation: Evidence from
private equity. EU Working Paper, 2009
Mahérault,
L., 2004. Is there Any Specific Equity Route for Small and Medium-Sized Family
Businesses? The French Experience, Family
Business Review, 17(3), pp. 221-235
Morgan, J., 2007. Private Equity Finance: How it works, what
its effects are, can it be justified? (Online) Available at: http://www.helsinki.fi/oik/globalgovernance/glo/publications/morgan/Working_paper_3%5B1%5D.pdf
(Accessed 1 April 2011)
Neuman, W.L., 2006. Social
research methods: Qualitative and quantitative approaches. 6th
ed. Boston, MA: Allyn & Bacon.
Patten, M.L., 2004. Understanding
research methods: An overview of the essentials. 4th ed. Glendale, CA:
Pyrczak Publishing.
Porsche SE, 2011. Company. (Online) Available at: http://www.porsche-se.com/pho/en/porschese/
(Accessed 1 April 2011)
Private Equity Growth
Capital Council, 2011. How Private Equity
Works. (Online) Available at: http://www.pegcc.org/just-the-facts/private-equity-handbook/
(Accessed 1 April 2011)
Thomas, R.S., Masulis,
R.W., 2009. Does Private Equity Create
Wealth? The Effects of Private Equity and Derivatives on Corporate Governance.
(Online) Available at: http://lawreview.uchicago.edu/issues/archive/v76/76_1/Masulis.pdf
(Accessed 1 April 2011)
Whited,
T.M., Wu, G., 2006. Financial constraints risk. Review of Financial Studies,
19(2), pp. 531-559
Zmijewski,
M.E., 1984. Methodological issues related to the estimation of financial
distress prediction models. Journal of Accounting Research, 22, pp.
59-82
No comments:
Post a Comment