Buyout Firms Slash R&D; Spending, Survey Shows

Companies involved in restructuring or leveraged buyouts cut back on research and development in 1987 while most other companies increased their spending, according to the National Science Foundation’s annual survey of industrial R&D.;

Also, the companies reduced their research and development staffs, according to the report, which was released Thursday.

The report may give added ammunition to critics who question the long-term competitiveness of companies involved in mergers, LBOs and other corporate restructurings. The report comes at a time Congress is considering legislation that would discourage LBOs, which are takeovers financed by debt to be repaid from the target company’s future earnings or from selling off assets.

“Both federal and industrial research support are important pillars for our nation’s economic competitiveness,” Erich Bloch, NSF director, said in a statement. “Any factor that causes reductions in research weakens our industries’ ability to compete internationally,” he added.

The NSF said its survey looked at 200 companies that together account for almost 90% of U.S. industrial research and development spending. Sixteen companies were identified as having recently been involved in a merger. Eight others were involved in leveraged buyouts, stock buybacks or major restructurings to avoid becoming targets of takeovers. Those eight companies reduced R&D; spending 12.8% between 1986 and 1987, the NSF said.

Many Industries Affected

The 24 companies together reduced R&D; spending 5.3% for the same period, while the other companies in the group of 200 reported a 5.4% increase, the NSF said.

The foundation said mergers, acquisitions and other restructurings had a dampening effect on the R&D; performance of various industries. Six of the 16 companies that had merged were in the transportation industry, the NSF said, adding that those companies reduced R&D; spending 5.5%. In the chemicals industry (including pharmaceuticals), companies affected by mergers, acquisitions or other restructurings reduced R&D; spending 4.5%. In contrast, the report said the rest of the industry reported a 9.8% increase in spending.

Some observers, however, questioned whether the survey’s results should necessarily be viewed negatively without knowing more about the companies surveyed. William G. Ouchi, a professor of management at UCLA’s Anderson Graduate School of Management, said the transportation companies cited--presumably including the recent airline mergers--may have found duplicated efforts.

Also, some “companies may not have been very efficiently managed. It could have been that their research labs had a lot of people doing nothing.”

The NSF report “bears some research” on which companies were studied, said Douglas K. Le Bon, a vice president at Wilshire Associates of Santa Monica and consultant to pension funds investing in LBOs. “Just because B follows A doesn’t mean A causes B,” he said.

Companies that are subjects of LBOs tend to be in mature industries such as retailing and food processing, with relatively low R&D; expenditures to begin with, he said. Lenders and investors want companies with stable cash flows and earnings that will be best positioned to repay large debts incurred in the deals, he said.

Le Bon added that firms acquired through LBOs will also tend to sell off units involved in heavy R&D; spending, since those units are most likely to have the least stable cash flows and earnings. That could account for any decline in R&D; spending at those firms.

“If you look for pieces to divest, you divest pieces that are susceptible to technology swings, since those companies have greater risks,” Le Bon said.

Times staff writer Bill Sing contributed to this story.