Tula, I’m so glad to see this. I read the NYT piece last week on the announcement of the closing of the plant.

I believe the spokesman justified it as a “business decision.” As if that were a get out of jail free pass — of course, it’s a business decision – to screw the workers and increase the profit for investors. That doesn’t make it a reasonable “business decision.”

It was interesting to me to read also (not surprising, just interesting) that Brynwood changed the recipe, bought cheaper, lower-quality ingredients, etc. when they bought the company.

We must make “private equity” just as eveil-sounding as “leveraged buyout.” LBO’s were a bad idea in the ’80’s, and they’re a bad idea now, accounting, I think, for a major portion of the destruction of our country’s manufacturing base, and for the reduction of pay and standard of living most of us are dealing with.

PE firms have absolutely no interest in being our corporate masters. They don’t have any interest in running corporations. Their sole concern is realize the highest possible exit multiples (and thus the highest possible returns) when they “flip” a company they own, either by selling it to some other chump, stupider than themselves, dismantling it and selling off the pieces or simply liquidating it – whatever explodes the relevant multiples the most. They don’t care if there are corporations left at all.

In corporate finance, a fundamental premise is that in s healthy business (commercial) decisions occur independently of how the business obtains its financing – the left and right side of a balance sheet are both interdependent and independent, if you will. The only time this principle is breached is when a company gets into trouble – goes into crisis and fails. Then the independence goes away. Effectively, then, the math of the PE industry can be said to require that their portfolio companies (the businesses they own) are to kept in a permanent state of crisis and failure.

Private equity Vulture capital firms

Thanks for this coverage.

Closing a plant and reopening it in another location, where a purpose in doing so is to avoid court orders or labor laws should be illegal. Even if done by changing the purported fictional legal person that owns or operates the facility. As in Europe, the obligation should follow the business regardless of the legal entity its owners choose to use. Whether the act is directed by the same or similar management group should be the standard.

Ditto with entering into bankruptcy merely to gut unions or their contracts. Lots of things are disallowed in bankruptcy: you can’t discharge your taxes or child support – or thanks to the GOP, your credit card debt. A business shouldn’t be able to use the process to corrupt the labor market for its convenience.

We can’t make it here anymore.

http://www.youtube.com/watch?v=jTW0y6kazWM

Well if it is any consolation to you, private equity firms were big users of credit which has now dried up. They are also highly leveraged and have gotten hammered as the value of their holdings has plummeted along with everything else in the economy. In fact, if you could look at their books, they are, like so many other players in the financial system, insolvent.

tula this is wrong on so many levels. what can we do to show solidarity with the stella d’oro workers in the plant closure fight?

I grew up eating these things. It makes me sad that the spirit of the original company slowly got rotted away by pure corporate greed.

Thanks for asking, Suzanne. There’s no formal actions set up by the union yet but I think a few comments directed to Brynwood might be in order:

Send and e-mail to Henk Hartong and Brynwood Partners at huppsv@brynwoodpartners.com or info@brynwoodpartners.com.

thanks tula – please keep us updated on this fight and let us know how we can assist in any formal actions in the future.

Tula, thanks for bringing us up to speed on this. It would be good to use this as an example of why we so need reform. I wish that they would picket the offices of Byrnwood too.

Oh, Tula, you don’t really think Brynwood cares about anyone’s opinion, do you? They are bottom line all the way.

If they cared about public opinion, they would have handled this very differently, and we could now be eating Stella d’Oro cookies in good conscience.

No offense meant, of course, please don’t take it that way. Do you think I’m being too cynical?

I’ve said before that the only solution I can see is to put the kabosch on the PE industry. And that means full taxation of merger synergies, minimum post acquisition hold periods (until flip), and limitations on the what type of cost savings can be introduced within a date certain lockup period following an acquisition (in other words, no firing people for some number of years following the merger). There also need to be limitations on leverage and possibly limitations on exit multiples within certain time horizons.

One idea would be to tax acquisition debt as windfall sale premia. In other words, if I buy a company for $100: $20 equity and $80 debt with the intention of reducing costs by a capitalized present value of $20 (by firing people) and then immediately selling the same company for $100 plus the $20 in capitalized cost savings or $120 and repaying the debt. Simplistically speaking, current PE industry conventions would mean that I made a 100% return on my equity ($20 became $40). After raping the company, I sell it for $120, repay the $80 in debt and pocket $40. I then pay taxes on my windfall gain: $40-20=20 (again, all this is very simplistic and is just intended to convey the idea). A case can be made for taxing the full $40. That’ll slow the PE firms down really quickly. OK, I guess I just committed treasonous heresy….

Again, like I said in a previous post, if we would just become a Socialist nation, we could eliminate all of these pesky problems caused by hyper-capitalism.

Hannity and Palin are already on board. Don’t believe me? watch…

http://progressnotcongress.org/?p=2025

The reason Brynwood wants to beat workers into the ground, besides their loathing of workers, is that each time the business was sold, the debt load increased. The business can’t make money paying a living wage because Brynwood has to make a profit after the crushing debt load.

Of course, none of this is transparent; the financial statements of Brynwood are not public, and neither are its reports to its investors.

When the union sues Byrnwood is there a penalty to be paid for negotiating in bad faith.

THe financial and vulture capitalists have eaten their seed corn.

Here they are, from their website:

MEET THE PARTNERS

Hendrik J. Hartong, Jr., Senior Managing Partner

Mr. Hartong, Jr. co-founded Brynwood in 1984. Upon closing Brynwood’s first investment in Air Express International Corporation in 1985, Mr. Hartong, Jr. became the company’s Chairman and Chief Executive Officer. When Brynwood II was formed in 1988, Mr. Hartong, Jr. relinquished the title of Chief Executive Officer. Prior to co-founding Brynwood, from 1981 to 1984, Mr. Hartong, Jr. was President and Chief Operating Officer of The Pittston Company, a NYSE-listed mineral and transportation company. From 1977 to 1981, he was President and Chief Executive Officer of The Brink’s Company, a security transportation company and an affiliate of The Pittston Company. Prior to joining The Brink’s Company, from 1973 to 1977, Mr. Hartong, Jr. was Group Vice President of North American Philips Corporation, a NYSE-listed company, with responsibility for six of Philips’ professional electronic equipment companies. From 1970 to 1973, he was Chairman, President and Chief Executive Officer of Simplex Wire and Cable Company, an AMEX-listed company. Prior to that, Mr. Hartong, Jr. was a consultant with McKinsey & Co. in both New York and Amsterdam.

Mr. Hartong, Jr. holds a B.A. in Economics from the University of Cincinnati and an M.B.A. from Harvard Business School.

Joan Y. McCabe, Managing Partner

Ms. McCabe joined the Brynwood III Advisory Committee in 1997 and upon the formation of Brynwood IV joined the Firm full-time as a Managing Partner. Prior to joining the Firm, Ms. McCabe managed her own mergers and acquisitions advisory firm. Previously, she spent 15 years as an investment banker at Kidder, Peabody & Co., Drexel Burnham Lambert Group Inc. and Paine Webber Group Inc.

Ms. McCabe holds a B.A. in History from Yale University and an M.B.A. from Harvard Business School.

Ian B. MacTaggart, Managing Partner

Mr. MacTaggart joined Brynwood in 1996. Prior to joining the Firm, Mr. MacTaggart spent six years at Merrill Lynch & Co., in both the Mergers and Acquisitions and the Corporate Finance departments.

Mr. MacTaggart holds a B.S. in Business Administration from Boston College and an M.B.A. from The Fuqua School of Business at Duke University.

Kevin C. Hartnett, Managing Partner

Mr. Hartnett has been affiliated with Brynwood since 1993, when he became Chief Financial Officer of J.B. Williams Company, Inc., a Brynwood II portfolio company. Prior to joining J.B. Williams Company, Inc., Mr. Hartnett spent four years as Director of Finance & Accounting for the Clorox Company and more than 15 years in various financial management assignments with Nestlé USA, Inc.

Mr. Hartnett holds a B.S. in Accounting from the University of Dayton and an M.B.A. from Iona College.

Hendrik J. Hartong III, Managing Partner

Mr. Hartong III has been affiliated with Brynwood since 1998, when he became President and Chief Executive Officer of Lincoln Snacks Company, a Brynwood III portfolio company. Prior to joining the Lincoln Snacks Company, Mr. Hartong III spent three years at Activision, Inc., a developer of computer and video game software, where he was Vice President of Marketing. From 1989 to 1995, he held various sales and marketing positions with Baskin Robbins USA Co. and Nestlé USA, Inc.

Mr. Hartong III holds a B.A. in History from Lafayette College and an M.B.A. from Harvard Business School.

Robert W. Sperry, Managing Partner

Mr. Sperry joined Brynwood in December 2003. Prior to joining the Firm, Mr. Sperry worked at C. Dean Metropoulos & Company from January 1997 to December 2003, serving as Chief Operating Officer for six of his seven years at the firm. CDM had an exclusive affiliation with Hicks, Muse, Tate & Furst Incorporated to focus on the acquisition and operation of companies in the consumer branded products industries in the United States and Europe. Mr. Sperry was directly involved with and shared responsibility for the operating direction and oversight of eight portfolio companies. Previously, Mr. Sperry spent 17 years with Nestlé USA, Inc., where he held several leadership roles in marketing, sales and general management, including as President of Sunline Brands, Nestlé’s sugar confections division.

Mr. Sperry holds a B.S. in Business Administration from Central Connecticut State University and has attended executive management programs at Cornell University and the International Institute for Management Development in Geneva, Switzerland.

Nicholas DiCarlo, Managing Partner and Chief Financial Officer

Mr. DiCarlo has been affiliated with the Brynwood funds since 2002, when Brynwood assumed managerial responsibility for the Robeco USA Inc. private equity funds, which included Village Voice Media, LLC, where DiCarlo was Executive Vice President and Chief Financial Officer. When Village Voice merged with New Times Media LLC in January 2006, DiCarlo joined Brynwood.

Prior to his eight years at Village Voice Media, he spent seven years with Harmon Publishing as Vice President of Finance/Production and eight years with The McGraw-Hill Companies in various financial and operational roles.

Mr. DiCarlo holds a B.S. in Finance and an M.B.A. from the University of Connecticut.

Dario U. Margve, Managing Partner

Mr. Margve has been affiliated with Brynwood since 1993 when he joined J.B. Williams Company, Inc., a Brynwood II portfolio company, serving as President and Chief Executive Officer for seven years. From 2004 until 2008, Mr. Margve was President and Chief Executive Officer of private equity-backed Spinrite, L.P., a leading manufacturer of craft yarn to the North American market. Prior to joining J.B. Williams Company, Inc., Mr. Margve spent eleven years with Nestlé U.S.A., Inc. in various sales and marketing management positions.

Mr. Margve holds a B.S. in engineering from the United States Military Academy at West Point, NY.

As you know, Brynwood and any LBO/PI predecessor chose to finance with debt not incurred by themselves, but by making their target borrow it, necessitating that the target gut itself to pay off “its” debt and pay predatory capitalists a rate of return no going concern can pay and remain a going concern.

That’s Brynwood’s chosen line of work, moving pieces on a financial chessboard. Actually running companies, keeping promises, managing people, markets and business cycles? That’s for chumps.

There’s no reason the legal system or the society that determines it, should enable or subsidize the Brynwoods. They could even punish them. Except that the unspoken reality behind the market myth, upon which we place excess reliance, is that the market only works for capital, not for labor, customers, suppliers, governments or communities to whom capital makes promises it only sometimes keeps.

Which is likely to mean their deals place even more debt burdens on their targets, accelerating the decline of real businesses.

Bombarding people with e-mails never hurts. The broader solution, of course, is changing the nation’s labor law, as I noted, but individuals need to a way to take action as well. The issue likely will go back to courts but until then, Byrnwood should know how many of us are ourraged by their actions.

“Actually running companies, keeping promises, managing people, markets and business cycles? That’s for chumps.”

Very nicely stated.

For every Master there must be many slaves beholden to the Master…

again, this analogy is imperfect. In the master-slave relationship the master has some interest in keeping the slave alive, somewhat healthy and thus productively working. In this case, whether the slave lives or dies is utterly irrelevant to the master. In fact, the master’s property is more valuable if the slaves who work it are all dead. Please see my response in #13 for how this rather counterintuitive process of how private equity works.

hehe, on the Hartong bio.. I worked on the re-dismantling of Pittston in the mid 90s.

btw, these bios are hilarious:
*Hartong – Pittston (raped coal and armored car company)
*McCabe – Kidder Peabody (i-bank that collapsed in scandal), Drexel Burnham Lambert (another i-bank that collasped in scandal – Milken’s firm)
*MacTaggart – Merrill Lynch (yet another failed i-bank)
*Sperry – Hicks Muse (extremely rapacious PE firm)
*diCarlo – Robeco (Dutch fund management firm)
*Margve – veteran PE person

Only Hartnett (Clorox and Nestle) would seem to know anything about running a real company.

Reply to #24..This is true for the worker slaves…but not the mental slaves that are beholden to corporate strategy, the fools that support unlimited corporate power.

I assume those Roman-numeraled entities are all legally distinct, so that Brynwood can sever and fold them at the first sign of trouble, like a lizard shedding its tail to escape.

Blub,

“In the master-slave relationship the master has some interest in keeping the slave alive, somewhat healthy and thus productively working. In this case, whether the slave lives or dies is utterly irrelevant to the master. In fact, the master’s property is more valuable if the slaves who work it are all dead.”

How do private equity firms make any money if the company they try to sell has been gutted in the way you describe? The majority of private equity investments are only successful when the company is healthier, larger and more profitable at the end of the investment.

And re: your example in 13
If you could sell the company for the same price you bought it for (plus cost savings), doesn’t that imply that the value added by those extra workers was zero? All things being equal, who would buy a company from the private equity sellers if their actions had left it broken?

Don’t get me wrong, the actions of this particular PE house do seem to me vindictive and spiteful. I wholeheartedly support labor laws that protect people from practices like this. I just think the conclusions everyone is drawing here are far too general.

I think my point is not that those workers add no value but that it is a common misunderstanding that PE firms are concerned with businesses as a going concern. They are not. They will weigh the relative value to them of selling/flipping the company in pieces, as assets instead of cashflow generating businesses, or as a single going concern, and they will go with whatever has the greatest value. Meanwhile, they will cut everything they can to achieve short term increaes in measures like EBITDA and EBITDA-CAPEX and Free Cashflow so that measures like Adjusted Market Value/EBITDA and AMV/(EBITDA-CAPEX) can be maximized, even if those short-term increases risk injury the cmopany’s longer term prospects. Given that they have increased the leverage on companies, remember, they may think they have more flexibility to play with workers’ salaries etc, espcially if they secured that debt at lower interest rates than the company’s pre-acquisition cost of capital. It’s a nasty game.

Here’s a case for breakup. Let’s say you had a company, let’s say it’s called Pittson (no relation to the real Pittston.. I’m making the numbers up, but the general logic was what actually happened to that company). Pittston, let’s say has two businesses: armored cars and coal. Let’s say the publicly listed company trades at a 3.5x AMV/EBITDA multiple (cheap!) to $100 million in EBITDA (so its worth $350 million). Let’s say that company had no debt at the time. So the big bad PE firm comes around and buys the company, taking it private, at say a 4.0x AMV/EBITDA multiple ($400 million), and levers it up 50% debt/total cap , plus strips out $10 million in cash on the balance sheet previously intended to pay workers’ bonuses, and gives it to themselves as an instant bonus (standard practice). The company is now private. Then they fire a bunch of people, sell a bunch of office space, make workers share computers, compromise coal mine safety, kill a few miners as result, break the union and hire illegal immigrants to drive their armored cars, whatever – revenues go down slightly as a result, but costs go down more than the revenues, so EBITDA actually goes up, to say, $140 million! They’re servicing all that extra debt, but remember, they put in only 50% of the purchase price in equity so they’re still ahead as long as they got a decent interest rate.

Now the real fun begins. The PE firm then does the following analysis: they determine that coal companies trade at 4x AMV/EBITDA but armored car companies SHOULD trade at 9x AMV/EBITDA (from a study of market comparables that are standalone armored car companies)… if only they could sell the two business separately. Ah! So the asset is worth more in pieces than as a whole company! Let’s say that each business accounts for 50% of total EBITDA (so $70 million each). In fact, if they ripped out the armored car company and simply shut down the coal mines, they’d still come out ahead, since they bought the whole company for 4x AND levered it up 50%. So… trash the coal mines and fire everybody, sell the armored car company at 9x for 9x$70 millin=$630 million, repay the debt of $200 million and they’ve just pocketed a handsome $430 million! And remember, they only put in $200 million in equity to buy the company for $400 million in the first place! They get rich! It’s beautiful stuff, if you’re evil.

To clarify one point: the reason why the publicly traded company traded at 3.5x but the coal business by itself trades at 4.0x is because of something called “conglomerate discount” – public funds investors don’t like companies for more than one business so they trade the company based on only one segment AND trade it at a discount to what it should be worth as a standalone to punish the company for confusing them. The armored car company was basically ignored by the investors, since pension funds don’t have a category for coal mine+service company so they classed the whole company as a coal mining firm and ignored the other bit. Happens all the time.

I try to buy locally.
I see China and I back off. It is cheaper, but is it better? Is buying Chinese helping America? Is cheaper really better than buying better?
I do NOT like talking to India when I have a problem with anything. I wan’t to talk to a person that I can relate to.
WTF. Where are our products? When can corporations forget profits and think about the country.
Sorry. I was thinking about real people and not corporate people.

The problem with the behavior of those who do LBOs is somewhat similar to the behavior of those who bought CDOs in the 2000s.

In an LBO situation the new owner generally strips the company of expenses, perhaps sells off less profitable parts and then tries to sell what remains back into the market as somehow a better company.

In a CDO situation a bunch of junk is packaged with good stuff and rated as AAA when in fact it isn’t. Then they sell the CDO to someone unawares of it’s true value.

In both cases they sell something as valuable when in fact it’s something else. The reasons these techniques work are somewhat different from one another.

A long time ago firms stopped offering dividends to keep capital for investment. Stock holders assumed the resulting company was worth more and the share price went up. The question was always whether the use of that capital was really going to be useful at that time in those market conditions. In the computer industry it usually did. In utilities or transportation it might not have been.

A CDO was simply based on a lie and the buyers were either blind or looked the other way. They thought they could sell it to another ‘greater fool’. After the housing crash it became apparent to everyone looking on that the toxic assets weren’t worth so much (perhaps 10%-50% of their face value) and that made the company’s worth much less. Naturally the stock value dropped.

One speculation/investment and the other a lie/speculation.

I don’t see that as good at all. When capital gets tied up it can’t do it’s work and all the human effort that was exerted to create that capital is essentially side-lined…rotting.

I don’t condone vulture/destructive capitalism, but good uses of capital are something we need just now.

That sounds quite illegal, though I don’t know what law would be relevant.

LBO: Buy a company with borrowed money.
Take everything of value (and give it to the LBOer), sell off parts, etc.
Then let the company go bankrupt…taking it’s debts to the grave.

How does the company’s owner not owe the debt?

THAT looks like something which would need to be illegal. It actually sounds a lot like the off-the-books financial entities created by Enron. They pushed debts off the books, so the company looked more valuable. That made it’s stock price soar and that enriched the top officers who had stock options.

The latest story from Texas about another Ponzi scheme would seem to verify your statement to the extreme.

They are stated generally, but believe it or not this is precisely how it all works. I suppose the idea in the market when this is working is that there may be over-capacity (in some sector) and that closing down a company this way converts investment back to working capital which is (according to the theory) more valuable at that time.

Take for example a time not so long ago – the 2000s – when the financial sector was go go go and ordinary manufacturing was passe. A PE firm does a LBO of a manufacturing concern, does it’s thing and sells off a skeleton. In the end they make money because they’ve gotten rid of a skeleton and produced lots of cash capital which can be invested in CDOs and maybe firms invested overseas — more profitable places.

The value of capital varies over time.

hey are also highly leveraged and have gotten hammered as the value of their holdings has plummeted along with everything else in the economy. In fact, if you could look at their books, they are, like so many other players in the financial system, insolvent.

This is also my understanding. And IMVHO, it bears plenty of repetition so the basic concept sinks in: they’ve borrowed money to buy things, gambling that we will bail them out. What part of this does Congress seem unable to comprehend…?

You seem to assume that these vultures intend to hold the investments over time. They don’t; they’re in it for money and emotion gets in the way of the calculations they need to make. Sentimentality is an impediment to what these guys do.

Think of these guys as pimps; money is the whore they pimp out.
But once credit derivatives and huge leverage came along, simply pimping out companies wasn’t good enough for them anymore; now, they leverage at odds as high as 30:1, knowing that if they lose we’ll cover their sorry asses.

There was a time when hedge funds probably served some very sound economic purposes in the process of wealth creation; however, with the emergence of tools like credit derivatives as a tool for hedging, they’ve gone completely out of control.

When leverage ratios became unstable (as high as 30:1) their activities turned radically predatory and destructive. No economic system can afford to pay out the equivilent of $29 on a $1 bet and remain functional for very long. But that’s the leverage ratio these guys were using, and that’s the ratio that our TARP funds were expected to cover in terms of ‘lost bets’.

Once derivatives came into the picture, their role of hedge funds in wealth creation was severely undermined by what can only be called their phenomenal, enormous ability to radically destabilize economic systems. Any system that costs you 29 to 1 is going to be catastrophic in a very rapid period; we’ve seen how destabilizing this has become in the complete absence of any form of regulatory oversight.

George Soros has recommended that government regulate CREDIT as well as MONEY SUPPLY. If that occurred, then hedge funds might be useful again.

At the moment, they’re become a threat to economic stability.
The wackier the leverage ratios, the more destabilizing they are to the larger economic system.

Just because these guys are socially well connected doesn’t mean they’re not assholes.

Hedge funds were not always evil, but after the late 1990s changes (that Sen Phil Gramm, R-Tx shepherded through the Senate) which Clinton signed off on, and which accelerated under BushCheney, the hedgies had access to global money, with no oversight, insane leverage, and new tools like CDOs. Basically, Congress designed economic vampires under the guise of ‘banking reform’.

Oh, BTW: in the Bronze Age, when a slave died, the chains were sent back to the forge to be remelted. The chains were sold at a higher value than the slave.

Not too much has changed in 3,000 years.

I suspect it has to do with how the deals and companies are structured and how much commission can be made by the loan officers and banks involved.

When I used to work in commercial construction, for example, one company I worked for had at least two legal personae at any given time. One was a development/management company that took out loans to build shopping centers and office parks on land it owned in areas that already had too many of both. The other was a general contracting and construction management firm that got the contracts to build the buildings for the development firm.

The development firm would take out a monster construction loan from a bank and hire the general contracting firm. It would pay out the loan money to the general contracting firm as the buildings were built, in a series of draws.

When all the money was drawn and the buildings were finished, the general contractor’s connection to the project was over. It had fulfilled its obligations and been paid for its work in accordance with contracts approved by the bank.

The development/managment firm was now supposed to lease the space or sell the buildings in order to retire the debt and make a profit of its own. But sadly, there were, as I said, already too many commercial buildings lying vacant. The development company invariably defaulted on the loan without ever renting a unit and went bankrupt.

This was called “selling a project to the bank,” and it was this particular firm’s only business at the time I worked for them. Bizarrely enough, the bank as often as not hired the general contracting firm–which was, of course, the real company–to maintain the vacant property while the bank/s sought tenants or buyers. They did this again and again until one of their lendors–a notorious saving and loan–got seized by the feds. Some other, more ovbviously illegal irregularities came to light and that was that.

I have a question and a comment.

If PE firms are so bad, and you outlaw them, then would this bakery have just gone into Chapter 7 (liquidation)?

I thought the PE firms (bad as they seem to be) only existed because there were distressed businesses that were going to fail totally.

Granted maybe the way of the future is for the Government to take over all businesses that are failing like GM and Chrysler, but I thought that was the exception since they were so big.