House Financial Services Committee Chairman Barney Frank raised the prospect yesterday that Congress could weigh in to protect workers facing job or benefit cuts when private-equity firms buy publicly traded companies.
Frank acknowledged at a committee hearing that it was unclear what steps Congress could take to address the issue. But the Massachusetts Democrat has used his leadership post to advocate shrinking the economic gap between average families and the wealthiest Americans.
"When a small number of individuals benefit from a particular deal in the tens and sometimes hundreds of millions of dollars, and, concurrently, workers are laid off, we have a situation which seems to me wrong," Frank said.
"To the extent that we see gross imbalances, then we're going to have to act," he said.
The growth in acquisitions by private-equity firms has sparked criticism from worker advocates who say buyers generate profit through reduced wages, job cuts, pared-down pensions, and other measures detrimental to employees.
The equity firms typically buy underperforming public companies and take them private for a few years to improve profitability before selling them. Private-equity firms have announced $372 billion in acquisitions this year, according to Bloomberg News data.
This week, for example, DaimlerChrysler AG agreed to sell its U.S. automaker, Chrysler Group, to Cerberus Capital Management L.P., getting out of almost $19 billion in pension and medical liabilities for retired U.S. employees.
Rep. Spencer Bachus of Alabama, the Financial Services Committee's top Republican, cautioned against regulating businesses with an "overly prescriptive" approach. He said that could drive private-equity firms offshore and compromise the competitiveness of U.S. capital markets.
Jon Luther, chairman and chief executive officer at Dunkin' Brands Inc., said his company had benefited from its acquisition last year by a group of private-equity firms, including Boston-based Bain Capital Partners L.L.C.
"Our new owners have never asked us to cut costs or reduce our head count," Luther told the House panel at the hearing.
The Canton, Mass., company, which franchises Dunkin' Donuts, Baskin-Robbins and Togo's stores, plans to add 250,000 jobs in the next 15 years, Luther said.
Unless private-equity firms change their practices on their own, "we think it is necessary that Congress should legislate," said Andrew Stern, president of the Service Employees International Union.
"There's more than enough wealth in the buyout business for private-equity firms to continue to prosper" while expanding "opportunities to communities, workers and our country," said Stern, who was union shop steward for social workers in Philadelphia in the mid-1970s. The SEIU is the largest U.S. union.
Private-equity firms only succeed if they improve the performance and increase the value of the companies in which they invest, said Douglas Lowenstein, president of the Private Equity Council, a Washington trade association representing some of the largest U.S. private-equity firms.
"Firing workers, stripping assets is hardly the best way to show future buyers that you've built something of greater value," Lowenstein said.
Yesterday's hearing was the second in a series Frank is holding on the role of private-equity and hedge funds in the U.S. and global financial markets.