A year ago I wrote about the sad story of the Simmons Mattress company, a well run outfit that got caught in the cross hairs of the investment bankers, and while they never had a problem making and selling mattresses at a profit they were bought and sold by a series of investment bankers, each one artificially pumping up the book value of the company, borrowing against the inflated value to pay themselves outrageous fees and to repay their investment, and ultimately driving the company into bankruptcy. Factories closed, people were laid off, suppliers short-changed, as the investment bankers took close to a billion dollars out of the value generations of hard working people had created.
This view of manufacturing as a piggy bank to be looted by clever financiers is actually quite common. I could have just as easily written about American Pad & Paper – AMPAD – a paper products manufacturer bought and sold by by an investment banking outfit and ending up in bankruptcy. The investment bankers put $5 million into the deal, took AMPAD debt from $11 million up to $400 million – a fourth of that new debt going to pay the investment banker. $5 million in, $100 million out, and the company ending up broke, 200 employees laid off and a plant closed. Another chunk of the $400 million went toward buying an AMPAD competitor – and promptly closing the competitor's plant and laying off 185 people. That deal jacked up the revenues of AMPAD, making it appear more valuable, in turn making the $100 million to the investment banker possible.
These sorts of leveraged buyout games have made investment bankers millionaires, and destroyed tens of thousands of manufacturing companies over the last thirty years. It is a legal way to suck all of the value others have created from a company without adding anything. Said the head of the investment banking outfit when asked about the plant closings and payoffs, "Sometimes the medicine is a little bitter but it is necessary to save the life of the patient. My job was to try and make the enterprise successful, and in my view the best security a family can have is that the business they work for is strong." Given that the manufacturers went into bankruptcy, the security was apparently for the banker's own family, and the business that remained strong was the investment banking company.
For those wondering why the destruction of a couple of paper companies a few decades ago is worth a blog post today, I should mention that the investment banking company was Bain Capital. The guy in charge, the author of the quote, and the one who made the most from the looting was Mitt Romney.
Romney is touted as an accomplished business person who can bring private sector thinking and leadership to the White House. The reality is he went straight from Harvard to consulting to investment banking to politics (with a brief stint running the Olympics along the way). His publicists make a lot of noise about Staples and a few other high profile companies Bain Capital backed, but leaves out the dozens of others - like GS Industries, a steel company that ended up bankrupt with a plant closed and 750 people laid off - that were looted for incredible returns and left high and dry. And they certainly don't like to discuss the shell companies in the Cayman Islands and the Bahamas Romney set up to enable foreign investors to put money into Bain investments while ducking US tax rates.
I cannot imagine anything worse for American manufacturing than putting a slick bottom feeder like Romney in the White House. His web site says he has, "an intimate knowledge of how our economy works." You bet he does. His use of that intimate knowledge is why he's wealthy and a lot of manufacturers are in shambles.
John Hunter says
I too am sick of the financiers and politicians that ruin people’s lives with their actions and policies.
Grant Lindsay says
My wife recently left a company that she had loved. Over a year ago she told me they had been sold and was excited about the new owners. They had visited the site and talked about people being the real asset of the company and how the people were the reason they decided to buy this branch. It sounded good, then she told me the name of the new owner…Bain Capital. Given her exitement and love for the company I carefully explained the likely outcome of this event and it has played out as predicted.
The “valuable people” started getting laid off. (The business is very cyclical)
The morale impact was immediately evident. My wife, who is very well educated an extremely hard worker and fiercly loyal, was starting to complain about a job she one talked about with a smile. I heard lots of stories about other people making negative comments about the company. The negative spiral started. Then the demand cycle turned. Now everyone was “required” to work 7 days a week (60 hrs ~50% increase), the result…more complaining from people and indications of quality problems. Note: A quality problem in this industry could kill the company and quite possibly some people. Last we heard the people in her group were loaded with 2 to 3 times the normal work load.
It appears they are right on track to become another case study on how to make money ruining a good company.
Scott says
Enjoy:
http://www.colbertnation.com/the-colbert-report-videos/389132/june-09-2011/the-word—the-business-end
Mark Graban says
A candidate with FAR more business experience (in actually growing businesses and saving jobs is Herman Cain). See him give President Clinton a real-world economics lesson in this town hall discussion from the 1990s:
http://www.youtube.com/watch?v=ptrTa8C_Pl4&NR=1
john rackell says
You write like a novelist with that great kicker at the end, Mr. Waddell.
I wonder if there was a happy ending with any of these companies in that modern bankruptcy is usually not fatal to a company, it’s just is a little breather for them to straighten their finances out or slough their debts off entirely.
Couldn’t someone eg a worker cooperative or management buyout have just picked up the rights to the brand name and the manufacturing assets for a pittance, leaving the bad debt to the investors and banks? ergo, no job losses.
Well, maybe only in novels, but do you know why, if the companies were worthy manufacturers, they weren’t salvaged. I mean that’s how markets should work and good assets get redeployed in making mattresses and paper thingies?
PS: I was curious if you had heard of Dan Coffey and his book The Myth of Japanese Efficiency (2007 published by Edward Elgar) and if you had any opinions about it. I have only read what’s available on Google books but it seems to make some strong claims against lean production particularly its role in Toyota’s preeminence. Perhaps it would cure your writer’s block to vent some spleen against it.
PPS: By the by, I really enjoyed your Rebirth book which I learned about via Kevin Carson’s masterful review of same. As you may know, Mr. Carson is philosophically opposed to modern copyright. It’s funny but I ordered your book through interlibrary loan and read it for five weeks gratis; so I enjoyed five weeks of culturally accepted, legal copyright infringement. Anyway, you could also say libraries are copyright infringers.
Cash Powell says
Bill, it’s about time someone commented. We need a book and cases. Like most other labor law, antitrust law, EPA law etc., those business activities which destroy people’s lives and resources or create monopolies to stick it to the customer, we need a law that controls investment destruction. I don’t know what kind of law, but I think the law might start from the results, fish diagram style, and work backup the chain. Thanks for the insight on Romney.
Robert Drescher says
Hi Bill
Your comments are very true investment banker rape pillage and plunder, but you left out a few other wyas they do it.
Even those companies they do not outrightly wipe out, they often bleed other slowly to death. Than their are those whose board they dominate that slowly move from successful and competitive to incompetent and incapable, because they drain resource from the operation to support the share price. They add layers of cost to every publicly traded company, non of which adds any value to what is actually done.
There are also other groups that are just as bad, pension plans, short-term investors (like some of us), speciculators of all types, fund managers, and lenders they all create drains not only on the companies they deal with, but on the rest of us as well.