With the untapering due any minute, and cost of debt set to plunge to even lower record levels, one thing is certain: the private equity industry is about to be bathed with even more costless credit and, with a portfolio of companies already accounting for 8% of US GDP, is about to accelerate its “going private” take over of America’s corporations. Of course, in the pursuit of the almighty cashflow driven IRR, all is fair in love and LBO wars, however, one group of people who may not like the outcome are America’s workers especially following tonight’s glimpse of the “cost-cutting” process that is about to be unleashed by the Fed-funded corner office on workers everywhere. A few hours ago First Data Corp., a KKR portfolio company, announced that it will suspend 401(k) contributions to employees and replace cash bonuses with stock “as part of its new chief executive’s strategy to return the credit-card processor to profitability.” The move was announced to all 24,000 employees of the Atlanta company in an internal memo Monday.
How big is the impact of this stunning move?
WSJ explains: “The pay overhaul takes effect Jan. 1 and will save the company about $60 million in cash next year. The yearly total is expected to grow to $100 million by 2017, equivalent to less than 1% of First Data’s overhead-related costs in 2012.”
In other words, the overall impact is negligible at best. Yet it is also so very crucial for KKR’s IRR analysis, if its portfolio company is forced to cut from its very muscle, and crush even the faintest worker dreams of a stable retirement funding (as a reminder, the traditional Pension Plan also died some time ago thanks to Ben Bernanke). It also means that even in a time of record low costs of capital, rational, sophisticated investors can no longer extract balance sheet arbitrage returns from portfolio firms, and the next big round of major layoffs (when this trifling 1% overhead cut is concluded) is just around the corner.
But that’s not all: as part of the cost-cutting initiative, rank and file workers will be forced to see the world through banker eyes: i.e., forego cash payments in exchange for a stock-based bonus. “First Data Chief Executive Frank Bisignano also wants to align the pay of top executives, rank-and-file workers and everyone in between more closely with owner KKR & Co., which took First Data private in 2007 for about $26 billion in one of the biggest leveraged buyouts ever but has struggled with the deal ever since.
First Data now matches 3.5% of employee contributions to 401(k) retirement-savings plans. Under the new plan, those contributions will be suspended, with employees getting stock instead. The changes will broaden employee stock-ownership, now roughly 1%, to nearly every First Data employee, including those at the company’s headquarters and a customer-service call center in Omaha, Neb.”
In addition, about 3,000 managers will get roughly half of their annual bonuses in stock. Those employees previously got half of their bonuses in immediate cash, plus a long-term cash payment that vested over three years. That long-term payment will now be granted in the form of stock.
“Given our challenged current profitability, it is necessary at this time and will allow us to fund investment in innovation and new product development,” Mr. Bisignano said about the changes in his memo to employees.
So now the choice is clear 401(k)s, and more overhead cuts… or CapEx. One wonders how many workers will bail immediately for greener pastures where the executive management still doesn’t follow the orders of Messers Kravis and Roberts.
Oh, and where does Mr. Bisignano – the man supposed to enact KKR’s plan – hail from? Why JPM of course.
And that concludes your glimpse of future worker conditions present and yet to come.