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October 16, 2009

Companies As Buy-And-Sell Commodities - Workers, Customers and Country As Costs

-- by Dave Johnson

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.

As we consider what we need to do to get our economy working again it is useful to look back at the things that went wrong.

The way people used to think about why you start a business was to make a product or provide a service. The business provides something that people need and if you do a good job and serve your customers well over time they will reward you for it. The better you do at that, the better you do for yourself. Right?

It's a pretty basic business model: a business does what it is in business to do, and people like it or don't, and the people who run the business do well or not accordingly.

For example, you would think that a mattress company was in the business of making mattresses, and a bakery was in the business of baking. You would think that an assisted living facility or nursing home company was in the business of caring for the people who came to them for care.

Maybe not – at least not for the owners and even managers of many of these companies. It turns out they’re not in those businesses. Sometimes, they’re not even there. Either way, they certainly don't care about mattresses or nursing homes or baking cookies. This is because of the rise of Wall Street dominance of American business. For the Wall Street crowd business models are something else entirely, and making something and serving customers is just not in the picture. In fact those things are in they way -- between the Wall Streeter banksters and their bonuses.

I’m talking about the private equity business, where the model is not unlike house-flipping during the insane housing boom. The model for them is get in, cut everything, grab all the cash you can and get out, never mind what it does to the companies, the customers, the employees or the country – that’s the new business model.

I wrote the other day about the Wall Street way of doing business:

Short-term gains for a few. Long-term harm to the rest of us.

… Our country let this happen because a wealthy few benefited in the short term from policies that harmed the rest of us over the long term. The wealthy few used some of the $$ gained to buy off lobby and contribute to campaigns of politicians who let them get away with it.

. . . The short-term benefits-to-a-few that were exchanged for long-term harm to the rest of us are now harming the rest of us here in the long term. We owe the rest of the world huge amounts of money. The economy has fallen apart because so many of us can't afford anything - like paying back the debts we had to take on to get by. Now the government can't do anything important because We, the People don't have the funds.

This is another story of a wealthy few selling off the country’s people and future, treating companies and people as commodities to be bought and sold for a quick short-term profit, with long-term harm done to the rest of us. The private equity company-buyout game works like this: buy a company, borrow against the company name and assets and put the proceeds straight into your pocket, sell off assets, outsource jobs, lay people off, cut pay and benefits for the rest, close facilities and factories, externalize costs onto the community, cheapen whatever the company makes or does, run up the debt some more, squeeze money out and pocket it and then sell. Hopefully you make off with the pension fund in the process.

Take a look at a recent NY Times story by Julie Creswell, about the destruction of Simmons Bedding, the mattress company, Profits for Buyout Firms as Company Debt Soared

Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

Bought and sold by a parade of investment groups,


For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.

People wiped out,

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined.

. . . Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

While a few made out like bandits.

They didn’t care about the employees. They didn’t care about the company. They didn’t care about the customer. They didn’t care about the country.

There were not in the business of making mattresses. And now America loses another company that made something.


Simmons is one of hundreds of companies swept up by private equity firms in the early part of this decade, during the greatest burst of corporate takeovers the world has ever seen.

Please read the entire story if you can. It’s the story of America since Reagan. The company was systematically plundered, slashing “costs” (aka the company’s future), cutting jobs and stealing pensions. (Bonus, read about how the CEO, while making $40 million, rarely showed up at headquarters, running the company from his yacht, with the company even paying the captain’s $92,000 salary. )

He didn't even bother to come in to company headquarters!

The chain of Simmons owners starts with William E. Simon, one of the architects of the modern conservative movement, buying the company, looting it. Then,


“A succession of private equity buyers came and went. Merrill Lynch Capital Partners bought Simmons in 1991 for … Merrill sold it to Investcorp, an investment group based in Bahrain, ... Two years later, Investcorp sold the company to Fenway ...

Then Thomas H. Lee Partners, known for Snapple, Rush Limbaugh’s early big advertiser, bought the company, and engaged in some financial magic. They:

“… created a holding company that it used to issue $300 million more in debt, which paid an additional $238 million dividend to the private equity firm. With that, THL had recouped its entire $327 million equity investment in Simmons.”

Yes, they borrowed against the company, paid themselves back what they paid for the company, sticking the lenders with the tab. And, of course, like the Wall Street bonuses from taxpayer bailous they get to keep that money, because … well just because.

THL was hardly alone in undertaking this sort of financial engineering, known as a dividend recapitalization. From 2003 to 2007, 188 companies controlled by private equity firms issued more than $75 billion in debt that was used to pay dividends to the buyout firms.

That was the story of one company destroyed by this private equity/hedge fund/ Wall Street game. Here is another, from May (also by Julie Creswell): Oh, No! What Happened to Archway?

Longstanding cookie makers with an extremely loyal fan base, Archway and its sister company, Mother’s, had their share of troubles in recent years as the once-family-controlled business that owned both brands was passed along from buyer to buyer — first to an Italian company, Parmalat, in 2000, and then, after an accounting scandal at Parmalat, to Catterton Partners in 2005.

The company was passed from buyer to buyer …

[. . .] “Those guys were stepping over quarters to pick up pennies,” he said. “They cut here and cut there and some of the things they needed to do. But, in my opinion, they threw away a lot of profits by a lot of bad decisions.”

After Catterton took over, Archway began ratcheting back spending on in-store promotions, which distributors contended made their cookies less competitive in stores. Catterton also abruptly shut a bakery and distribution plant in Oakland, Calif., which had made Mother’s Cookies for several decades. Operations were shifted elsewhere.

The product cheapened …

Besides putting 230 of the Oakland plant’s employees out of work, the closure had another negative effect. It lengthened the time between when the cookies were baked and when they hit store shelves around the country.

Some also believe that Archway altered its recipes or ingredients. Mr. Gallagher, the distributor, said that as time went on, he ended up having to eat a lot of cookies that he couldn’t sell. “I noticed, over time, they were getting worse and worse.”

Mr. Zinzer is more blunt: “Our cookies turned to crap. They were nowhere near as good as they used to be.”

A former employee inside the headquarters, who declined to be identified because of continuing litigation, said that as the company’s troubles worsened, the company began using less expensive ingredients in its cookies.

Customers treated like ATM machines,

When Mr. Pfeifer called Archway, however, to get a credit for the opened cookies, rather than simply filling out a form as he had done in the past, he said he was told he had to cut the individual seals on all of the wrappers on the pallet.

“Clearly that was meant to deter me from asking for credit. I said, ‘Forget it,’ ” Mr. Pfeifer said. “I took it all to the dump.”

Inevitably the story ends with this in the news last week: Mother's Cookies abruptly shut down

Mother's Cookies, an Oakland institution for 92 years, has been shuttered, its owner seeking bankruptcy protection for the company.

The ending was abrupt: Workers for the company, which shifted its baking and distribution operations to plants in Ohio and Canada in 2006, told workers Friday that operations would cease and cookies would no longer be made as of Monday.

. . . The owners did not comply with the federal law that requires a 60-day notification of any layoffs


Another plant shut down. More people laid off. Some very rich people pocketed a lot of money...

Next: Part II: Assisted living and nursing homes that aren't really in the assist or nurse business, and Stella D-Oro.

Notes -

SEIU's Behind the Buyouts site.

Flipped. How Private Equity Dealmakers Can Win While Their Companies Lose -- NYT Videos on the private equity game.

Also -

Take a look at the agenda for the Building the New Economy conference, Thursday, October 29, 2009 — 9:30 a.m.-3:30 p.m. at the Washington Court Hotel in Washington, D.C.
This conference sounds the call for the new economy we must build out of the ruins of the old. It focuses on the need for a new agenda to revive manufacturing in America.
-- Oh, it's free. But you have to RSVP.

Posted by Dave Johnson at October 16, 2009 7:49 AM


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