The next big threat to your job

By Jim Jubak

The next threat to your job is already looming on the horizon. It could go to work as early as the second half of 2007 -- even if the economy as a whole stays relatively strong.

That would be a huge reversal of recent good news on job losses in the United States.

Layoffs announced in 2006 fell by 22%, according to a survey by outplacement specialist Challenger, Gray & Christmas. The number of layoffs in the Challenger survey was down 57% from the peak in the current layoff cycle that began in 2001.

The Challenger survey isn't especially comprehensive, since the company surveys only a fraction of the companies that might be announcing layoffs, but it is a good indicator of the trend in the labor market. And that trend is definitely positive. As I've argued in the first two parts of this series, "Why fewer U.S. jobs are going overseas" and "A 15% raise? Try India or China," the flow of U.S. jobs overseas, a big part of the peak in layoffs in the past few years, is definitely slowing.

But don't get too comfortable. If your job is less likely now to be outsourced overseas than was the case a couple of years back, that doesn't mean your job is safe. I can already see the first signs of the next big thing in layoffs. It was built on Wall Street and financed with cheap money from around the globe. I'm talking about the boom in acquisitions, both public and private deals, in 2006.

What's the first thing an acquirer does after the deal is signed? We all know the answer to that. It fires workers to achieve the "cost savings" that were touted as a key reason for doing the deal in the first place. Wall Street demands them, and CEOs, with their compensation frequently tied to achieving these cost-cutting targets, are only too "incentivized" to comply.

So the huge boom in mergers and acquisitions in 2006 is likely to be very, very bad news for workers in 2007.

How big was this boom? Record-breaking.

The total value of deals in which one company acquired another soared to almost $4 trillion globally in 2006, according to Dealogic, up about $500 billion from the record set in 2000, the peak year of the technology stock frenzy. The private equity market -- where investors use a pool of money raised from private investors to buy a public company, delist its shares from a public stock market and take it private -- saw an even faster rise, to a global total of $750 billion, up 103% from 2005. Private equity deals accounted for 19% of all global acquisitions, up from 12% in 2005.

Downsizing has already begun

The first layoffs from the mergers-and-acquisitions boom has started. For example, VNU, the parent of Nielsen Media Research and ACNielsen, among other media properties, in December began the first of a planned 4,100 job cuts, about 10% of the company's worldwide work force. VNU had been acquired in a $10 billion deal last summer by private equity company Valcon Acquisition, which represents private equity investors AlpInvest Partners, The Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners. But most are yet to come. Public and private acquirers are by and large saying they're not planning any layoffs. No guarantees, they're quick to add, however.

I believe them, too -- at least until the acquirers need to produce a profit to justify their investment.

Which is why the high prices being paid in many of these deals make me worry that we will see layoffs no matter what the acquirers' intentions.

So for example, Freeport-McMoRan Copper & Gold (FCX, news, msgs) has said that it's not contemplating any layoffs as a result of its $26 billion acquisition of Phelps Dodge (PD, news, msgs). Fair enough. On paper the deal works just fine as long as copper prices stay near the historic highs they hit in 2006. But if copper prices fall (and they've been moving lower recently), Freeport-McMoRan will be under pressure to justify the 33% premium to the last-traded share price it paid for Phelps Dodge. (Some pretty lofty expectations were baked into the price of Phelps Dodge shares even before the deal: Wall Street was already expecting 137% earnings growth from Phelps Dodge for the March 2007 quarter. The Freeport-McMoRan premium is on top of that.) Think job cuts and other "synergies" won't be on the table if copper prices retreat?

Or look at the $17.6 billion acquisition of Freescale Semiconductor by a private equity group headed by The Blackstone Group. The $40 share price in that deal represented a 36% premium to the share price before the deal.

I think this is a pretty savvy move by Blackstone and its partners, even with that premium. If Freescale moves to a fabless model -- the company would sell off its factories and hire a foundry such as Taiwan Semiconductor Manufacturing (TSM, news, msgs) to manufacture its chips -- it could reduce its need for capital, increase cash flow and improve the predictability of earnings. If the company combined with another semiconductor company, say the semiconductor business that these private equity investors just bought from Koninklijke Philips Electronics (PHG, news, msgs), it could actually produce the synergies -- in research, in product development, in manufacturing and in marketing -- that Wall Street so eloquently talks about. (The combined semiconductor company would be one of the 10 largest in the world.)

And I'm very sure that Blackstone and friends have figured out that they could easily load some debt on the balance sheet of this company, which right now, like a lot of technology companies, is just about free of debt. That would increase the return on equity at Freescale and might give the private investors a way to finance the sale of at least part of their stake back to the company at a favorable price.

But if the chip market slows or profit margins on new products disappoint, you can bet that, here too, job cuts will be on the table. No way are the investors in any of these private equity partnerships going to quietly accept a low rate of return.

Spiff up for the sale

The ultimate need for a profitable exit strategy also argues for layoffs as a result of the private equity boom of 2006. Private equity investors get their money back -- and produce their profits -- when they sell the company they've purchased to another buyer. Most often that buyer is the public market.

Here's the process: Buy the company, rearrange the assets, rejigger the finances and put as much lipstick on the pig as is necessary so investors in the public market will pay a high price for the shares in an IPO (initial public offering).

It used to be that this round trip from public to private to public again would take two or more years. For example, disk drive maker Seagate Technology (STX, news, msgs) went private in 2000 and then went public again 2002. (After shedding 40,000 jobs, I might note.) That was fast, way back then.

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