J. Scott Applewhite/AP Photo
Former Treasury Secretary Timothy Geithner seen testifying on Capitol Hill in July 2012
On Tuesday morning, shareholders of London-based G4S, one of the largest private security companies in the world, approved a deal to be bought out by U.S.-based firm Allied Universal. The $5.3 billion deal will create one of the largest private employers in the world, amassing 800,000 workers globally between the two firms. But there’s one key difference between the two companies: G4S is public, while Allied Universal is backed by private equity.
One of the Dodd-Frank Act’s greatest architects is behind the merger. Tim Geithner, the Obama-era Treasury secretary who helped banks escape the 2008 financial crisis relatively unscathed, is the president of Warburg Pincus, the main private equity firm backing the acquisition. The major buyout wouldn’t be possible without Allied Universal assuming debt—and a lot of it.
“The regime of cheap, easy debt, and massive corporate debt, started when Geithner was Treasury secretary,” said Jim Baker, executive director for the Private Equity Stakeholder Project. “It’s been a dramatic benefit to companies like Warburg Pincus, that can draw on that debt to levels that frankly create risk for the companies that they’re acquiring.”
Warburg Pincus and other investors are only willing to front $700 million for the deal. The other 87 percent of the buyout is coming from billions of dollars in loans. That means the soon-to-be conjoined company will assume $4.6 billion in debt from this acquisition alone, on top of the pre-existing debt of each company, bringing the grand total to $13.8 billion. Although federal interest rates, and therefore interest on this borrowing, are currently low, over the long term a corporate debt load of this magnitude will undoubtedly put pressure on Allied Universal to cut costs. “In a deal like this, the ones who really bear the risk for that debt are the 800,000 workers around the world,” said Baker.
This lopsided acquisition—which is common in private equity–backed deals—has left the companies’ employees concerned. GMB Union, the largest union for security workers in the U.K., released a statement expressing its worries about the funding scheme. “It must be recognised that this funding formula risks putting G4S’s financial future less in the hands of its own operations and more on Allied Universal’s ability to pay off its debts and on the financial fortunes of its private equity owners,” the statement said.
Geithner and Warburg Pincus declined to comment for this story.
According to a 2019 study by Harvard University and the University of Chicago, leveraged buyouts like this, in which a private equity company buys a publicly traded company, on average result in a 13 percent decrease in employment within the first two years. The researchers also concluded that wages typically fall after private equity buyouts. When a company takes on this much debt, it can be strained to cut costs wherever possible. Often, that comes at the expense of its workers.
Federal and state officials have also expressed their reservations. “Why haven’t we heard more about this deal that will create a behemoth with hundreds of thousands of workers and will be the third-largest private employer on the globe?” asked Illinois State Treasurer Michael W. Frerichs in a January press release, when Allied Universal was still bidding for G4S against another firm, GardaWorld.
Ultimately, the private equity firms don’t have a lot to lose from these debt-fueled deals, as they are only responsible for the equity they front (in this case, the $700 million). Baker says that in the worst-case scenario, if the portfolio company declares bankruptcy, the private equity firm walks away scot-free by poaching the spiraling firm of its assets before it folds entirely.
The Securities and Exchange Commission (SEC), which is the federal agency responsible for overseeing the acquisition, declined to comment on the matter.
Unions and watchdog groups alike are also worried by the fact that private equity–backed companies are not held to the same standards of transparency as publicly traded companies. According to Baker, G4S reports its financial performance and major litigation to the public on a regular basis as a publicly traded company. But once it comes under the wings of Allied Universal, this built-in transparency will all but evaporate.
Even as a public company, G4S has already come under heavy scrutiny for malpractice, so much so that in 2019 it was blacklisted by a major investor for violating workers’ rights in the Middle East. When it goes private, Baker warns that these issues might only become worse.
Private security companies are assuming the responsibilities of public security officers with more and more frequency, even being called the “private police” in some countries. The U.S. government contracts with G4S to police embassies around the world. Private armed guards are often seen policing everything from federal buildings to vaccine sites. Allied Universal and G4S are already major players in the multibillion-dollar industry as separate entities. Together, Baker says that they will be even more difficult to regulate.
Since Geithner took over Warburg Pincus, the firm’s portfolio companies have courted controversy on several occasions. One company, Mariner Finance, has been criticized for its business model of sending checks to poor Americans, with little disclosure that cashing the checks would tie the individuals to a high-interest-rate loan. It recently increased its stake in a Chinese car company whose chairman co-founded Luckin Coffee, which fabricated most of its revenues in 2019. And retail startup Julep went from thriving business to bankruptcy in just two years after a Warburg Pincus investment.
