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Hostess Brands: Bain-Style Vulture Capitalism Wins Again

by: countrycat

Sat Nov 17, 2012 at 12:03:21 PM CST


Don't fall for the Wall Street Journal & company hype about the Hostess shutdown. In their version, it's all about "greedy unions."  Yes, the company was bled dry - but not by the workers: this is yet another case of vulture capitalism at work.

Too many in the media are happy to just rewrite Hostess management press releases on the issue.  For example, here's this nice, long Reuters article about the shutdown:

Hostess managers have complained that terms of many of the 300 labor contracts that the company has in place have bogged down its ability to be both nimble and cost-competitive.

"The union has been the death of this company," said a human resources manager who recently left Hostess.

.... because I guess that's easier than actually looking at the history of the dispute.  Let's give them a hand with, say, actual journalism instead of lazy stenography. This handy little infographic is a start:What Really Happened At Hostess

This graphic doesn't touch on one really important aspect of this dispute, but the Wall Street Journal covered the issue in April:

Creditors of Hostess Brands Inc. said in court papers the company may have "manipulated" its executives' salaries higher in the months leading up to its Chapter 11 filing, in what the creditors called a possible effort by Hostess to "sidestep" Bankruptcy Code compensation provisions.

In fact, this whole issue is a "Bain Capital template" for how to break unions, bleed companies dry, lay off workers, and laugh all the way to the bank.  David Stockman wrote about it in October:

In truth, LBOs are capitalism’s natural undertakers—vulture investors who feed on failing businesses. Due to bad policy, however, they have now become monsters of the financial midway that strip-mine cash from healthy businesses and recycle it mostly to the top 1 percent.

CNBC touched on this issue in an interview with Hostess CEO Greg Rayburn:

Greg, you are owned by private equity ripplewood, and when you think about the leverage that was put on the company, was that a mistake? did you crack some of this up to the structure of this company and how it's not been operated necessarily but financed?

"It's a good question. i do turnarounds for a living so i see a lot of these situations. i came into this situation in february and i have said in town hall meetings in plants there is plenty of blame to go around. i think management was poor. i think a lot of decisions were poor. i think the leverage prohibited the company from making capital investments that it should have been making and i think that was a mistake. but then you add on legacy pension and liabilities from the unions....."

Yep, the private equity firm bought the company, loaded it up with debt, siphoned off the profits, underfunded the contractually-obligated pension payments by $944 million, and shuffled through 6 CEOs in 8 years.

At the same time, company executives were insulated from the pain:

BCTGM members are well aware that as the company was preparing to file for bankruptcy earlier this year, the then CEO of Hostess was awarded a 300 percent raise (from approximately $750,000 to $2,550,000) and at least nine other top executives of the company received massive pay raises. One such executive received a pay increase from $500,000 to $900,000 and another received one taking his salary from $375,000 to $656,256.

Looks as though the vulture capitalists will once again float to the top of the sewage pond.  After shedding pesky employees and walking away from almost a billion dollars in pension obligations, they'll sell the brands off, cake by cake, to other vulture capitalists:

Pabst Brewing Co. owner C. Dean Metropoulos & Co. is considering an offer to buy Hostess Brands Inc., which said today it plans to liquidate its business. 

“Our family would love to purchase these iconic brands,” Daren Metropoulos, a principal at the private-equity firm, said today in an e-mail. “We have analyzed this opportunity very carefully for a few years now. Shedding the complications of the unions and old plants makes it even more attractive.” 

Yep... analyzed the "opportunity" for "a few years."  The fix was in and now all that remains are worker pink slips and owner profits.

Let's distill this behavior down to its essence.  It's like stealing a car and selling it for parts.  Only theft on this grand of a scale is actually legal.

 

countrycat :: Hostess Brands: Bain-Style Vulture Capitalism Wins Again
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A small correction (4.00 / 1)
I saw this news somewhere else and there was a correction on the pay increase of the CEO. His pay was raised to $1,200,000, rather than the $2,550,000 originally reported. This does not change the point that the company was pillaged by the executives. As countrycat says, Bain-style vulture capitalism with the exit strategy already baked in. (Pun intended.)

Thanks! (0.00 / 0)

I didn't see that, but I'll look harder & update the post with a link.

And forgive me for such a belated welcome to Left in Alabama!  I saw your first comment earlier in the week and meant to give you the traditional....

"Welcome to Left In Alabama!  Please feel free to hang out, comment, and write your own diaries about issues you're knowledgable and passionate about.  Any problems posting or commenting, please contact an admin for help."

But I forgot....

So here we go.    WELCOME TO LEFT IN ALABAMA!!

 



"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."  - John Kenneth Galbraith




[ Parent ]
Thank you (4.00 / 2)

I was pleased to find this blog in a list of links I get on a daily basis from another site. So few of us here in Alabama it seems.

I've considered writing about macro-economics. That's where my formal education is and I've been studying it again for the past 2-3 years. Almost everything the public hears from mainstream economists, the financial press, politicians and the financial elites about money and how our monetary system actually operates is WRONG. They (and the public) are stuck thinking in a gold-standard paradigm when, in fact, the US went off the gold standard in 1933 domestically and in 1971 internationally. Since 1971 we have had a fiat currency in this country and it is a completely different paradigm.

By refusing to understand and acknowledge that we have a different system now, we get stuck in arguments that are irrelevant. The key difference is this: In a gold-standard paradigm the federal government is limited in how much money it can create by the amount of gold in its vaults. In a fiat system, the amount of currency the government can create is theoretically unlimited. (That doesn't mean we should create unlimited amounts, there are some practical limits.) This means that as the monopoly issuer of our sovereign currency the US can never "run out of money." We don't borrow from China, and taxes no longer "fund" government, they serve to control aggregate demand.

Therefore, all these discussions about reducing the deficit and controlling the debt are not only wrong, they are destructive to the prosperity of our economy. The question is no longer "Can we afford it?"; the question is will we have enough REAL goods and services to provide for the needs of the population and what should be the equitable distribution of those goods and services.

There is a heterodox economic theory called Modern Monetary Theory that has been developed over the past 20 or so years based on Abba Lerner's functional finance, Wynne Godley's sectoral balance approach and Hyman Minsky's work that accurately describes the monetary operations of the fiat money system used by the federal government.

If everyone believes we are running out of money, then it is easy to convince them that we must all sacrifice for the good of the country. BULLS#!T. The sacrifices being pushed on us will affect the poor and middle class by shredding the social safety net so many depend on. Social Security is solvent for the next couple of decades and the federal government can fund Medicare and Medicaid and anything else at whatever level we decide. The Grand Bargain is a Great Betrayal of the democratic ideals of community we supposedly espouse.

Okay, I've ranted enough for one morning. Perhaps I will start writing on a regular basis if I can find the time. In the meantime, I would be happy to answer any questions anyone may have.

Thanks again for your welcome and your blog. 



[ Parent ]
Regarding the links .... (4.00 / 1)
Several folks have expressed appreciation for the links to other progressive sites.  Unfortunately, I suspect they're somewhat out of date.  Daddycat has offered to do some link maintenance for us in the next few weeks, so who knows of other progressive sites in Alabama that ought to be on our sidebar?

Work harder and work smarter!

[ Parent ]
Links (4.00 / 1)

Please, Daddycat, clean up that link section!  Some have been inactive for years.

This will help the credibility of this wonderful site.



[ Parent ]
Thanks! (4.00 / 2)
I was getting sick of hearing the "unions did it!" narrative, but I didn't have the time to look more closely.

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