Saturday, November 17, 2012

The private equity company ate our Twinkies


"It is hard to blame workers for not putting their trust in a management team that shows little competence and is rapidly stuffing its pockets at the company's expense. It is bad news for workers and the economy as a whole when such people gain control of major corporations."
-- Dean Baker, in "No Cupcake: Workers Turn Down
Bad Deal from Hostess
," on the CEPR website

by Ken

It's hardly surprising that the Infotainment Noozemedia are reporting the apparent death of Hostess, makers of Twinkies, Ho-Hos, and Wonder Bread, as yet another story of the insatiable greed of those goddamned unions. As the legend would have it, because the workers were too selfish and short-sighted to make concessions to the management struggling to save the company, the company is to be liquidated, the brand made kaput, and 18,000 workers put out of their jobs.

By now we should know better than to give any credence to such fairy tales. It appears that in the real-world story, the workers have been doing pretty much nothing but making concessions, while their bosses (who aren't bakers or baked-goods marketers, but a private equity firm). have apparently done nothing for the business but quite a lot to it, in the form of taking its already-huge debt and enormously increasing it through a second bankruptcies (which are supposed to be used to get debt under control), while doing nothing anyone can point to which would increase Hostess's marketplace viability -- all the while stuffing their own pockets.

As economist Dean Baker of the Center for Economic and Policy Research put it in his CEPR post yesterday (with background information provided by his colleagues Eileen Appelbaum and Mark Weisbrot:
[I]t is not clear that [the workers] had a better route available to them. It is important to understand a bit about the history of Hostess in assessing whether the workers and their union made the right call.
Dean looked first at how Hostess wound up in bankruptcy originally.
Hostess has been relying on pretty much the same mix of products for decades. While other companies have sought to adjust to changing consumer tastes, Hostess still gets the vast majority of its revenue from a relatively small number of products that it has been selling in largely the same form since the sixties. This failure to innovate was the main reason that the company first went into bankruptcy in 2004.
There doesn't seem any question that Hostess needed new leadership. Instead, after five years in  bankruptcy, it got the private equity company Ripplewood Holdings, which took over in February 2009.
Remarkably, [Hostesss] exited bankruptcy with nearly $670 million in debt, almost 50 percent more than the $450 million it owed when it went into bankruptcy. Usually companies use bankruptcy to shed debt. With Hostess the opposite was true.

This meant that Ripplewood was taking a heavily leveraged gamble. If the company survived, it would get a very high return on its investment. However there was a strong likelihood that the company would not be able to make it given its extraordinary debt burden and the weakness of the economy.

Ripplewood first asked workers for concessions in August of 2011. The workers refused since they had made substantial concessions in 2008 to facilitate the exit from bankruptcy. The concessions did not prevent layoffs of close to 20 percent of the workforce. The company also had stopped making payment to the pension fund in July of 2011 and is now more than $160 million in arrears.

Ripplewood took the company back into bankruptcy in January of this year, owing close to $1 billion. It has used bankruptcy to impose new contract terms on workers. This is the immediate cause of the current impasse, with the bakery workers’ union refusing to accept the reductions in pay and benefits and changes in work rules demanded by management.

Workers had several important issues to consider beyond just the prospect of working for less pay and under worse conditions. First, and most importantly, there was little reason to have much confidence in the current management team. They had done nothing to turn the company around in the three years since the last bankruptcy and there was little reason to believe that they would do any better going forward.

Accepting new concessions would provide no guarantee of job security. In fact, management wanted the unions to agree to the closure of 10-12 plants (of its choosing) as part of a new contract. This means that many of the company’s 18,000 workers would soon have been laid off even if the workers had accepted management’s terms.

Second, management was not shy about rewarding itself in spite of the company’s poor financial condition. The CEO upped his annual pay to $2.25 million and other top executives got raises of 35-80 percent. This doesn’t seem like the behavior of management that puts the survival of the company first.

Third, the financial situation of the pension has to be a top concern for workers. While the pension is guaranteed by the Pension Benefit Guarantee Corporation, the guarantee for multi-employer plans like the one at Hostess is limited. If the plan were to become insolvent then many workers would see large cuts in benefits.

From this standpoint, if Hostess were to continue to put off contributions to the pension and allow it to become badly underfunded, then workers could be looking at sharply reduced pensions in retirement. Workers who are approaching retirement age may view this prospect as a far greater danger than the risk of losing their job at this stage in their career.

Whether or not it was good judgment for the workers and their unions to refuse the concessions demanded by management is not clear. At this point, it’s still possible that the company was bluffing and will keep some of its plants open or that another buyer will come in and keep some of the plants operating.

However it is hard to blame workers for not putting their trust in a management team that shows little competence and is rapidly stuffing its pockets at the company’s expense. It is bad news for workers and the economy as a whole when such people gain control of major corporations.


In response to my post last night wishing a tearful farewell to former President-in-Waiting Willard Inc. ("Bye-bye, Willard! Don't let the door slam behind you!"), reader outnow2012 offered some interesting and, I think, persuasive observations on what lies behind all that endlessly regurgitated nonsense we've been hearing come out of the maw of the former governor -- what I have taken to referring as simply "stuff he says," toward which he seems to feel neither attachment nor responsibility.
I think I may have found the key to understanding why Romney says the things he does; and it's important in trying to understand some components of the GOP platform.

I can't find the reference right now, but I know it dates from 2007. Being questioned by a reporter about the content of a letter he had written which contained statements that seemed very much at odds with his public positions, Romney apparently said: "You have to keep in mind who I was writing the letter to."

Many have said that Romney is a salesman, but it's difficult for many of us to grasp how completely this actually describes him. Almost all social behaviors can be reduced to a "transaction", but Romney is one of those people - there are plenty of them - who have a natural affinity for an explicitly transactional style of conduct, to the extent that they find it difficult to understand behavior which is NOT explicitly transactional.

What separates Romney's explicit transactionality from what we liberals regard as a decent, civilized code of behavior (which as I said can also be regarded as transactional) is the crudeness of the currency - plain hard cash, or "financial gifts". The word "gifts" is deliberate sarcasm.

Romney once again was caught in a situation where he was speaking directly to donors. It's exactly the same as the 47% incident, except that in May he was trying to explain how he was going to win the election and yesterday he was trying to explain why he didn't, both in the same explicitly transactional terms. That's not only what he understands, but what he expects that THEY - the donors - will understand. (I suspect some of them might be less likely to go along with his second explanation than they were with the first.)

This is not to say that Romney doesn't have an equally repugnant belief system underlying what he says; he most certainly does. In both of these cases he was working hard to "suck up", but the words and the imagery he chooses - when he could say much the same thing in a very different way if he chose - speak volumes.
I expressed my admiration for this explanation, but did note that "there are honest and dishonest salespersons. The honest ones rarely have to account for extreme and intense contradictions." And outnow2012 returned to the subject:
It's important to understand that in Romney's professional world, achievement is not measured in terms of ethics such as honest vs dishonesty. All that matters is completing the transaction. The bottom line is the only goal, and the only guide for HOW that should be achieved or maximised, is the need to avoid illegal behavior. Doing his job well, for Romney and others like him, means completely internalizing this very simple ethic. The difference between truth and falsehood is otherwise irrelevant.

This is why we saw so much "twisting and churning" in the way he presented his case, most notably on the night of the first debate. To us, it was pure unmitigated gall to pivot as he did. He had the audacity to attack the President FROM THE LEFT, and most will never forgive him for that. For him, however, it was a brilliant move. The only thing that mattered was how he looked to the people at home, many of whom had never seen him speak before and knew very little about what he was selling.(Incidentally, it made one thing very clear: there was no way he could sell that brand of conservatism on its own merits.)

That, until recently, has been regarded pretty much universally as the business code of ethics. It's beginning to change - we have such things now as "social enterprise" - but I can be almost certain that Romney has never heard of such a thing, and the American legal code is also yet to recognize it. I bet you yourself don't know that 2012 is the International Year of the Co-operative; that business model is also making a strong comeback.

It's difficult to envision the U.S. waking up to these changes any time soon - but on the other hand, when America makes up its mind to do something (such as embracing progressive government) it's amazing what can happen. From that point of view, it's an exciting time to be an American.
There is, unfortunately, no way of holding Ripplewood to account for its competence at operating a company that makes baked goods. Maybe the company sincerely thought it could effectuate a turnaround, and the looting of the company in the form of running up all that new debt, and pocketing a good piece of the proceeds while demonizing poorly paid workers for refusing to decimate their own livelihoods -- well, maybe that was all a secondary activity to its sincere efforts to make Hostess once again a player in the baked-goods market.

And maybe someone will turn up evidence of such efforts. It's pretty much academic now. Now that the company has been run into the ground, the equity gang will sell off whatever it can, pocket those proceeds, and let the whole lot of those nervy workers to rot. That'll serve 'em right!

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At 2:38 AM, Blogger John said...

Ripplewood should be thanked profusely for ridding the country of its first, perhaps, but certainly premier producer of toxic "food product"!!!

The realm of candy, chewing gum, soda, junk food and high fructose corn syrup-laced everything is a tragically accurate metaphor of our committing slow, national suicide in obedient and tenacious adoration of an ideology of economic organization created of, by and for the few.

For example:
Summarized: "U.S. sees diabetes rates skyrocket"

John Puma

At 5:15 AM, Anonymous Lee said...

Here's what Josh Kosman wrote on my FB wall.Josh is a PE reporter at the NY Post and wrote the definitive book on Private Equity called The Buyout of America.

"Without the pay cuts, Hostess was headed for liquidation. Part of the problem is the hedge fund creditors are also providing emergency financing. They will pull the plug is they believe they can make more through liquidation"

I have said this over and over Labor needs a new narrative and a new enemy which is PE firms.

At 6:04 AM, Blogger KenInNY said...

Thanks, Lee! I'm not sure that tells me much, but then, I'm not sure I would know if it did!



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