Archive for the ‘Private Equity’ Category

Private Equity and Public Assistance

Thursday, March 6th, 2014

schwarzmanEverything seems to be coming up roses for the barons of private equity. A front-page article in the Wall Street Journal headlined BLOWOUT HAUL FOR BUYOUT TYCOONS proclaims: “Private equity’s top moguls took home more than $2.6 billion last year as booming markets allowed their firms to cash out of investments and notch blockbuster gains.”

Leon Black, the founder and chief executive of Apollo Global Management, led the pack with $546 million in compensation. Stephen Schwarzman of Blackstone received $465 million and William Conway of the Carlyle Group $346 million. These three men are also well-placed on the new Forbes list of the world’s billionaires. Schwarzman comes in at No.122 with a net worth of $10 billion; Black at No. 240 and a net worth of $5.8 billion; and Conway No. 520 with $3.1 billion in net worth.

Vibrant stock markets are not the only reason for these massive paydays and accumulated fortunes. It’s well known that these firms and their principals also make out like bandits because of the favorable federal tax treatment of the revenue they extract from their portfolio companies. Now it is possible to demonstrate the extent to which the buyout kings are also being subsidized by state and local governments.

My colleagues and I at Good Jobs First recently unveiled a major enhancement of our Subsidy Tracker database. The main refinement in version 2.0 is the addition of parent-subsidiary linkages for more than 25,000 individuals entries accounting for 75 percent of the dollar value of the entire Tracker universe. These entries have been linked to nearly 1,000 parent companies, including many of the world’s largest corporations.

Included among the parent companies are the big private equity firms. In our matching process, we made sure to check which of the portfolio companies of those buyout firms were among the subsidy recipients included in Tracker. We found a lot.

Of the 50 largest buyout firms on the Private Equity International ranking of the largest players in that field,  30 were found to have subsidized portfolio companies. (Many of the other 20 either don’t reveal their portfolios or don’t do business in the United States.) Those companies had received a total of 1,332 subsidies worth $1.8 billion (dollar values are not available for some awards).

Here are the buyout firms whose portfolio companies have received the most in cumulative subsidies:

  • Silver Lake Partners is No. 35 on our list of top parent companies, with total associated subsidies of $482 million. This is mainly a reflection of the fact that Silver Lake took over the computer company Dell, which has received giant subsidies in places such as North Carolina and Tennessee.  (We attribute past subsidies to a company’s current parent, since awards often stretch over many years and usually transfer with a change of ownership.)
  • Onex is No. 45 on the list with subsidies of $388 million, the largest amounts coming from the large packages Spirit AeroSystems received in North Carolina and Kansas.
  • Blackstone is No. 91, with 141 subsidy awards totaling $203 million awarded to several dozen of its portfolio companies.
  • Apollo Global Management comes in at No. 111, with 107 subsidies amounting to $158 million. Among its most heavily subsidized portfolio companies are Berry Plastics and Verso Paper.

Other major buyout firms are also on the list, including TPG Capital ($68.6 million), KKR ($54.9 million), Bain Capital ($51.6 million) and the Carlyle Group ($36.6 million).

By themselves, state and local subsidies are usually not the predominant factor in the profitability of a portfolio company, but they certainly can contribute to a fatter bottom line. In a recent article about Subsidy Tracker, the investor website Motley Fool wrote:

Companies which are clearly adept at seeking out incentives are much more likely to be able to keep more of their hard-earned income as these subsidies often take the form of a multi-year tax break. Lower effective taxes within a state can allow for more research and development as well as hiring, which can lead to even faster growth for these companies. In other words, seeking out companies with large subsidies is another way of giving yourself an edge over the uninformed investor. Keep in mind that a large subsidy alone is no guarantee of a companies’ success, but it often translates into lower taxes and higher profits.

And when that company is in the portfolio of a buyout firm, those higher profits means that the operation can more easily be taken public and further enrich the likes of Black, Schwarzman and Conway.

Sins of the Other Bain

Thursday, May 24th, 2012

Those seeking to defend Mitt Romney’s track record at Bain Capital argue that private equity is a special kind of business. The firms that are taken over, they tell us, are often in bad shape, and restoring them to health may involve some painful surgery.

Turnaround situations, they insist, cannot be judged by customary job creation benchmarks.

The problem with this claim is that the harsh remedies applied at supposedly sick companies have often been used at healthier ones as well—and this practice is exemplified by the career of none other than Mitt Romney. Prior to his tenure at Bain Capital, Romney spent a decade as a management consultant, mostly at the firm of Bain & Co., which launched Bain Capital.

When the young Romney joined Bain & Co. in the late 1970s, management consulting was starting to be regarded with the same kind of mistrust today directed toward private equity and hedge funds. Sure, the consultants were celebrated by some as wizards of the corporate world, yet their magic frequently involved getting large companies to embark on radical restructuring that resulted in the elimination of many jobs and the multiplication of the workload of those workers who remained. Although their advice was frequently dressed up in strategic jargon, firms such as McKinsey were essentially perpetuating Frederick Taylor’s time-and-motion studies of the 1920s.

Bringing in an outside consulting firm enabled corporate managers to carry out drastic measures that would otherwise face insurmountable internal resistance. And the results could be disastrous, as seen in the retrenchment plan that Booz Allen cooked up for supermarket chain A&P in the 1970s.

Consultants fueled the manic business restructuring of the 1980s by making corporate executives think that joining in was a matter of survival. “If a chief executive officer isn’t thinking of restructuring, he’s not doing his job,” Jim Farley of Booz Allen insisted to the Wall Street Journal in 1985.

Bain & Co. was not satisfied with simply giving aggressive advice to companies; the firm wanted to be involved in implementing the changes. That could lead to trouble. During the 1980s, when Bain had some 60 of its staffers in its London office working on the Guinness account, it became embroiled in a scandal over illegal stock manipulation by the brewer during the takeover of a rival beverage company.

The creation of Bain Capital was a vehicle by which Bain’s principals could not only help implement restructurings but also profit from them in ways that were even more lucrative than consulting fees. Romney, who was tapped to run the offshoot, admitted to a Forbes interviewer (11/30/87) that his outfit worked very closely with Bain & Co., often hiring partners from the consulting firm to run the companies it was buying. Bain Capital also did deals involving companies that had been clients of Bain & Co. One of Romney’s first big scores involved the buyout of Accuride, a truck wheel unit of Firestone, which had been a long-time user of Bain’s consulting services.

Romney’s ties to Bain & Co. remained so close that when the consulting firm ran into financial problems of its own—exacerbated by a huge cash-out by founder Bill Bain and other senior executives—Romney was called in to complete a rescue that included the internal use of downsizing and restructuring measures it had so often executed at client firms.

The continuity between Romney’s work at Bain & Co. and his slash-and-burn activities at Bain Capital is suggested by the track record of his clients during his consulting years, which at Bain lasted from 1977 to 1984. It’s been reported that those clients included Monsanto, Corning, Burlington Industries and Outboard Marine.

Using the handy Fortune 500 online archive, I tracked the total headcount at the four companies during Romney’s Bain & Co. years. Each one of them had a dramatic drop: 14 percent at Monsanto, 17 percent at Corning, 25 percent at Burlington Industries and 33 percent at Outboard Marine. Together, they shed more than 36,000 workers from the end of 1976 to the end of 1984. Undoubtedly, there were other factors at work, but Romney and his Bain & Co. colleagues must have played a significant role in bringing about that job destruction.

Private equity can be a ruthless business, but its methods are not entirely unknown to the rest of the corporate world, especially when management consultants get into the act. Mitt Romney, whose business experience is supposed to qualify him for the White House, should answer for his actions at both Bains.

Romney Bites the Government Hand that Has Fed His Fortune

Thursday, January 12th, 2012

Occupy Wall Street may be getting less attention in the corporate media these days, but the movement’s message about the brutal and inequitable nature of contemporary U.S. business is front and center in an unlikely arena: the debate among the Republican contenders.

In recent days, Newt Gingrich and Rick Perry have assailed the business track record of Mitt Romney, using terms such as “vulture capitalism,” “looting” and “job killing” to describe his activities at buyout firm Bain Capital in the 1980s and 1990s.

Showing how frustrated personal ambition can outweigh ideology, Gingrich and Perry are espousing views far from their usual reactionary postures. It is the hypocrisy of frontrunner Romney, however, that is of greater significance. While being attacked from the faux Left by Gingrich and Perry, Romney has been veering to the Right. In his victory speech after the New Hampshire primary, he attacked President Obama for supposedly promoting “the politics of envy” and “resentment of success.” Channeling Ronald Reagan, he vowed that “the path I lay out is not one paved with ever increasing government checks and cradle-to-grave assurances that government will always be the answer.”

Yet a look at Romney’s record at Bain shows not only Gordon Gekko-like business buccaneering, but also a willingness to embrace those very government checks and assurances he is now repudiating. Companies acquired and managed by Bain during Romney’s tenure showed no hesitation in taking taxpayer handouts in the form of state and local economic development subsidies.

A comparison of the 1999 Bain portfolio obtained by the Los Angeles Times to the information in the Subsidy Tracker database my colleagues and I at Good Jobs First created (as well as other sources), yields examples such as the following:

Steel Dynamics Inc. In 1994 this company, among whose financial backers at the time was Bain, got a $77 million subsidy package—including grants, property tax abatements, tax credits and reimbursement for training costs—for its steel mill in DeKalb County, Indiana (Fort Wayne Journal Gazette, June 23, 1994).

GS Industries. In 1996 American Iron Reduction LLC, a joint venture of GS Industries (which had been taken private by Bain in 1993) and Birmingham Steel, sought some $20 million in tax breaks in connection with its plan to build a plant in Louisiana’s St. James Parish (Baton Rouge Advocate, April 6, 1996). As the United Steelworkers union noted recently, GS Industries later applied for a federal loan guarantee, but before the deal could be implemented the company went bankrupt.

Sealy. A year after the 1997 buyout of this leading mattress company by Bain and other private equity firms, Sealy received $600,000 from state and local authorities in North Carolina to move its corporate offices, a research center and a manufacturing plant from Ohio (Greensboro News & Record, March 31, 1998). In 2004 Bain and its partners sold Sealy to another private equity group.

GT Bicycles. In 1997 GT, then owned by Bain and other investors, decided to move its manufacturing operations to an enterprise zone in Santa Ana, California. Being in the zone gave the company, which was later purchased by Schwinn, special tax credits relating to hiring and the purchase of equipment (Orange County Register, July 9, 1999).

Since Romney arranged to share in Bain’s profits after he left the firm in 1999, it is legitimate to look at cases of subsidy grabbing by Bain companies after that time. Some of these involved firms that had been acquired during Romney’s tenure but which didn’t get their subsidies until after he departed. For example:

Stream International. In 2000, this operator of call centers, then controlled by Bain, agreed to open a facility in Kalispell, Montana, but only if local officials provided $4 million in grants and tax breaks (The Missoulian, February 8, 2000). U.S. Senator Max Baucus also arranged for a $500,000 grant from the federal Economic Development Administration (AP, March 4, 2000). Later that year, Stream got Silver City, New Mexico to provide tax credits, subsidized training and subsidized rent for another call center (Albuquerque Tribune, July 12, 2000).

Alliance Laundry Systems. In 2000 this maker of washing machines, purchased by Bain in 1998, received a $560,000 grant from the state of Florida in connection with its plan to move a commercial laundry from Cincinnati. (Tallahassee Democrat, June 8, 2000). In 2004 the company received $1.25 million in assistance (including a low-cost loan of $1 million and a $250,000 grant) from the state of Wisconsin. Bain sold the company to a Canadian pension fund in 2005.

Romney’s ongoing profit participation also makes it legitimate to look at subsidies that have gone to companies acquired by Bain after Romney moved into public life:

Burger King Corporation.  In 2005—while owned by Bain, TPG and Goldman Sachs—Burger King let it be known that it was considering moving its headquarters from the Miami area to Houston. After local and state officials put together a $9 million subsidy package, the company agreed to stay in South Florida but move to a new building.  Two years later, Burger King dropped the idea of a new headquarters altogether and had to repay $3 million of the package (which came from a Quick Action Closing Fund grant) to the state as a result. Bain and its partners sold off their remaining interest in Burger King in 2010.

Quintiles Transnational Corp. When Bain and other private equity firms bought this pharmaceutical services company in 2007 they inherited a $25 million subsidy package that the company had negotiated with North Carolina officials in 2006. The package included an up-front $2 million grant from the One North Carolina Fund, a $2 million matching grant from Durham County, and the promise of up to $21.4 million over 12 years from a performance-based Job Development Investment Grant.

AMC Entertainment. After being promised more than $40 million in subsidies, this movie chain (bought in 2004 by Bain and other private equity firms) agreed to move its headquarters from downtown Kansas City, Missouri to a nearby suburb across the state line in Kansas. The deal was criticized as an egregious case of taxpayer-financed sprawl.

And finally, what about Staples, whose early backing by Bain is frequently cited by Romney as the best example of his business acumen? The chain has long been making use of economic development subsidies, including the period when Romney was still at Bain. In 1996, for example, it chose Hagerstown, Maryland as the site for a distribution center after getting a $4.2 million subsidy package (Baltimore Sun, April 16, 1996).

It’s quite possible that Romney’s recent anti-government comments, like much of what he says, are not meant to be taken too seriously. But as long as he is spouting free-market rhetoric, he needs to be reminded about the extent to which his ascent (and that of the rest of the 1% ) has been propelled by public money.

Barbarians on the Big Board

Thursday, July 8th, 2010

The barbarians have finally become full-fledged members of the business establishment. The buyout firm Kohlberg Kravis Roberts & Co., which for three decades has targeted publicly traded corporations, is about to start trading on the New York Stock Exchange. The one-time master of taking companies private is now taking itself public.

Seeing KKR featured on the business pages sparks flashbacks to the 1980s, when the firm was at the center of the largest transformation of corporate America since the days of the robber barons. Yet KKR is of interest not only for historical reasons. Its financial maneuvers harmed the American economy in ways that are still being felt today.

Fortune once called KKR founder Jerome Kohlberg Jr. “the spiritual father of the entire LBO industry,” LBO being short for leveraged buyouts – the process of buying control of a company using its own borrowing capacity. Frequently working with top executives who wanted to share in the windfall, KKR took over companies with the intention of restructuring them and later taking them public again at a fat profit. Workers were usually the ones who paid the price, through layoffs or intensified work.

Led by Henry Kravis and George Roberts (Kohlberg was pushed out), KKR used a series of such buyouts to became the country’s second largest conglomerate (after General Electric), with control of corporate trophies such as Beatrice, Safeway Stores and Owens-Illinois. A Business Week cover story dubbed Kravis “King Henry,” while Fortune dubbed him and his partner “Masters of the Buyout Game.”

The greed and reckless speculation of LBOs reached its apotheosis in 1988 in the battle for RJR Nabisco. KKR emerged victorious from the free-for-all and carried out what was then a record $25 billion takeover of the tobacco and food giant. The excesses of all involved inspired Time magazine to write that the process had “crossed an invisible line that separates reasonable conduct from anarchy.” Bryan Burrough and John Helyar titled their 1990 book about the takeover Barbarians at the Gate.

After the RJR Nabisco deal, the appetite for major LBOs waned, in large part because of the collapse of the market for the junk bonds that made most of those deals possible — a collapse hastened by the demise of Drexel Burnham Lambert amid an insider trading scandal. KKR survived, though its stature was considerably diminished. Its reputation took a big hit in 1991, when Sarah Bartlett’s book on the firm, The Money Machine, accused KKR of gouging its own investors, including public pension funds.

KKR held on during the deal drought of the 1990s and finally got its reward in the mid-2000s, when buyouts started to enjoy a resurgence. This time around, KKR and the other LBO firms, now operating under the sanitized rubric of private equity, avoided much of the risk of the dealmaking of the 1980s and shamelessly milked bought-out firms with bloated management fees. As a 2006 Wall Street Journal headline put it, “In Today’s Buyouts, Payday for Firms is Never Far Away.”

The Great Recession has put a crimp in the private equity game, but KKR could not resist one more big deal: itself. For the past three years it has struggled to go public in a convoluted process involving an offshore affiliate based in Guernsey. Now it finally seems to be succeeding, but this is hardly a cause for celebration.

KKR’s initial offering serves mainly as a reminder of how much the firm has done to bring about our current economic ills. KKR helped popularize the idea that wealth could be created out of thin air rather than real productive activity. Its buyouts were part of the inspiration for securitization and other machinations that precipitated the near meltdown of the financial system in 2008. Given that the interest paid on LBO debt was deductible on company tax returns, KKR’s buyouts also pioneered the dubious practice of having the federal government effectively subsidize wheeling and dealing, paving the way to the Big Bailout of Wall Street.

All those deals made Henry Kravis and George Roberts very rich, but they have left the country much poorer.

Pressuring Big Business to Start Rehiring

Friday, October 9th, 2009

hyattThe conventional wisdom is that the emerging economic rebound will be a jobless recovery for a long time to come. Yet there is no consensus on why this is the case.

Congressional Republicans are all too willing to cite the purported shortcomings of the Democrats’ stimulus program, but their ulterior political motives are transparent. Some claim that banks are keeping too tight a lid on business credit, while others suggest that newly frugal consumers are to blame for not spending more.

There is surprisingly little criticism being directed at those who are in the best position to do something about joblessness: employers, especially large ones. The assumption seems to be that corporations are helpless victims of economic turmoil and cannot be expected to start hiring again on their own initiative.

Now, it is being said, we need to give companies an extra incentive to replenish their payrolls. Congress and the Obama Administration are reported to be giving serious consideration to the creation of a new tax credit for job creation. This would be a boon for those who get hired, but it is more than a bit infuriating that we now need to subsidize employers to do what used to happen routinely when the business cycle began to turn around.

The coddling of the employer class is all the more questionable given that, in many cases, large-scale layoffs appear to be a matter of choice rather than necessity. Take the case of computer maker Dell, which just announced that it will obliterate more than 900 jobs as part of its decision to close an assembly plant in Winston-Salem, North Carolina that it opened in 2005 after pressuring state and local governments to cough up some $300 million in subsidies. Dell said the move was “part of an ongoing initiative to enhance the long-term value it delivers to customers by simplifying operations and improving efficiency.” Translation: the company has been selling off its production facilities to cut costs and raise profits.

Or consider Simmons Bedding Company, which has laid off 1,000 workers and will probably shed more as it heads to bankruptcy court. Its problems are less the state of the economy than the effects of having been taken over by a series of private equity firms that have milked the operation dry.

Then there’s the situation of the housekeepers at Boston-area Hyatt hotels who were forced out of their $15 an hour jobs so the company could replace them with $8 an hour temps. Before being told that they were being booted out, the housekeepers were asked to train the temps, whom they were told would be filling in during vacations. The layoffs have prompted protests in Boston and around the country (photo).

In Fremont, California, nearly 5,000 workers at the New United Motor Manufacturing plant are losing their jobs because Toyota decided to get rid of its only unionized U.S. operation after the new federally subsidized General Motors exited what had been a 25-year joint venture between the two companies.

Last month, drugmaker Eli Lilly said it would eliminate 5,000 jobs as part of a restructuring designed to “speed medicines from its pipeline to patients.”

These recent examples are part of a trend that began well before the current crisis. For the past decade, U.S. private sector employment levels have been stagnant as corporations engaged in an orgy of offshore outsourcing, union-busting, downsizing and compelling the workers who remained to produce more than ever before.

This is not to say that all job losses can be blamed on restructuring and corporate greed, but neither is it accurate to attribute them all to forces beyond the control of employers. Instead of focusing exclusively on bribing corporations to hire people, it would be good to hear some criticism of big business for failing to do enough to help the country recover from the unemployment crisis—and for causing much of that crisis through its short-sighted and self-interested practices.

For years, large corporations announced layoffs as a way of currying favor with Wall Street. It would be refreshing to have them now feel pressure to announce new hiring to appease the rest of us.

Corporate Cookie Monsters

Friday, July 10th, 2009

hartongThe Pyrrhic victory achieved by the Stella D’Oro workers in the Bronx — they won an eleven-month strike but are slated to lose their jobs anyway — says a lot about what is wrong with American capitalism.

One lesson is obvious: there is no fairness in a collective bargaining system in which employers can make unreasonable demands (which in this case included a 20 percent pay cut and elimination of paid vacation and sick days), pretend to bargain until an impasse is reached and then bring in strikebreakers when the workers are compelled to walk off the job.

The Stella D’Oro situation was unusual in that a National Labor Relations Board administrative law judge finally ordered the reinstatement of the strikers, but that was only because he found that management failed to provide the union, Local 50 of the Bakery Workers, an audited financial statement to substantiate company claims of financial distress.

Whatever satisfaction the workers, who exhibited amazing solidarity during the strike, took in the NLRB ruling was dampened by the company’s subsequent announcement that it plans to shut down the plant, which has been in operation for more than half a century. The company abided by its WARN Act notice obligation, but in the current economic climate it will be difficult for workers to find other employment within 90 days.

Much has been made of the fact that Stella D’Oro is now owned by Brynwood Partners, one of those bloodsucking private equity firms. Brynwood — headed by Hendrik Hartong Jr. (photo) — certainly deserves plenty of scorn for its treatment of the workers. This is a firm, after all, that did not hesitate to accept taxpayer funds in the form of a 2008 Manufacturing Assistance Grant of $175,000 from the Empire State Development Corporation. It has also received property tax abatements from New York City.

Apparently Brynwood, whose website brags that its investments have earned a 28.8 percent overall rate of return, thought it was under no obligation to give back to the community and to its workers. It is unfortunate that among the investors in Brynwood are public pension funds such as the Pennsylvania State Employees Retirement System.

While the Stella D’Oro dispute is certainly a case of private equity behaving badly, it should be admitted that the cookie company was not always a model employer under its previous owner, publicly traded Kraft Foods, which in 2006 sold the business to Brynwood. In 2002 and 2003 Teamsters Local 550, which represented the company’s delivery drivers, clashed with Stella D’Oro management during negotiations on a new contract. The Teamsters struck the company in February 2003 to block what the union said was a plan to replace union drivers with non-union ones, and soon the walkout spread to other Kraft facilities in the New York metropolitan area. It appears the union got crushed.

The behavior of the Cookie Monsters who have run Stella D’Oro shows that removing barriers to union organizing is not the only urgent task for labor law reform. The system also needs to be changed to prevent unscrupulous employers from undermining unions already in place.

Calling in the Vultures

Friday, May 22nd, 2009

vulturesOnly one day after Treasury Secretary Timothy Geithner told the Senate Banking Committee that the nation’s financial system is “starting to heal,” bank regulators took a step indicating that parts of the system are still festering. The FDIC announced that it had seized BankUnited, a struggling institution in Florida with assets of about $13 billion. It was the biggest bank failure this year. The collapse will cost the insurance fund about $4.9 billion.

BankUnited’s demise was expected for some time. The company’s big bet on option adjustable-rate mortgages backfired when the housing market in the Sunshine State began to shrivel. Although BankUnited avoided the subprime market, many supposedly prime customers with those option ARMs, which allow one to lower interest payments in the first years of a mortgage by adding to the principal, found themselves seriously under water and started to default.

But what’s most significant about the takeover of BankUnited is who the FDIC got to buy the bank: a private-equity group led by John Kanas, the former head of North Fork Bank, who has joined forces with prominent vulture investor Wilbur L. Ross Jr. Also involved are funds managed by the Carlyle Group and Centerbridge Partners. In other words, the FDIC delivered BankUnited’s depositors and employees into the hands of aggressive private-equity firms.

The FDIC announcement casually noted: “Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments. In the near future, the FDIC will provide generally applicable policy guidance on eligibility and other terms and conditions for such investments to guide potential investors.” In other words, the FDIC realizes it is doing something risky, but it will figure out its policy after approving the deal.

Geithner previously raised the prospect of subsidizing private-equity firms and hedge funds to buy up the toxic assets held by banks. Now regulators are putting a bank itself in the hands of those wheeler-dealers.

Particularly troubling is the role of Ross, who has a long history of bottom-feeding in industries such as textiles, steel and coal. In the latter sector, his International Coal Group was the parent company of the Sago mine, where a 2006 explosion resulted in the deaths of a dozen miners. The mine had been repeatedly cited for safety violations.

The BankUnited deal could open the door to a wave of bank takeovers by private equity firms, which are not known for their enlightened management practices. If you think banks are run irresponsibly now, just wait until the vultures are in charge.

Will the WARN Act Become More than a Headache for Job-Cutting Employers?

Monday, April 7th, 2008

The buyout industry—or private equity, as it prefers to be called—likes to give the impression that it creates new jobs rather than destroying them in the companies it takes over. Yet plant closings do occur among private equity portfolio firms, and in some cases the owners aren’t even willing to observe basic federal law governing shutdowns. The other day, the Dow Jones LBO Wire ran a story noting that several buyout firms have been sued for allegedly violating the Worker Adjustment and Retraining Notification Act, or WARN Act for short.

One of the defendants is Code Hennessy & Simmons LLC, which is charged with failing to provide the required 60 days’ warning when its portfolio company Hoboken Wood Flooring abruptly shut its doors last fall. Another case involves Reliant Equity Investors, which is said to have violated WARN when layoffs occurred recently at its company BlueSky Brands.

The Dow Jones story referred to WARN as “an obscure and somewhat toothless labor law” that was “causing headaches for buyout firms.” To reinforce the latter idea, the web version of the article was illustrated with two aspirin containers.

It is true that WARN currently leaves something to be desired in terms of effectiveness. This was made abundantly clear in a four-part series by James Drew and Steve Eder that ran in the Toledo Blade last summer. They found that the 1988 legislation “is so full of loopholes and flaws that employers repeatedly skirt it with little or no penalty.” Part of the problem is that Congress did not provide for enforcement of the act, so workers must bring their own court actions that often result in meager settlements.

While buyout firms (and other employers) would probably prefer to see the law repealed, some pro-labor members of Congress are pushing to strengthen the act. At the same time, states such as New Jersey are moving to enact their own WARN Acts that go beyond the current federal statute. (For details on both federal and state initiatives, see the website of the Sugar Law Center for Economic and Social Justice, which has worked on WARN issues since its founding in 1991.)

Layoff notification requirements by themselves are no solution for job dislocation, but given the way the economy is going, workers need all the help they can get.

Some other WARN resources:
Toledo Blade Interactive map with info on WARN lawsuits Congressional Research Service report (September 26, 2007)
GAO report (September 2003)
Directory of State Rapid Response Coordinators