Archive for the ‘Restructuring’ Category

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.

Behind the GM Euphoria

Friday, November 19th, 2010

Wall Street is always looking for a reason to be euphoric, and it found one this week in the return to the market of General Motors.

Less than two years after filing for bankruptcy and being taken over by the federal government in a $50 billion bailout, the automaker became the darling of investors and commanded a surprisingly high initial price of $33 a share.

Many of those investors had apparently not read the voluminous S-1 Registration Statement that GM filed with the Securities and Exchange Commission. If they had, they would have found a document that in its current iteration requires more than 13,000 words to summarize the risk factors facing the company.

Companies are required to be especially candid in warning investors what they may be facing when buying into a company whose shares are being offered for the first time (after its transformation GM is technically a new firm). But this prospectus is amazing. Here are some reasons why.

  • Acknowledging that its current chief executive and chief financial officer are from other fields, the S-1 says the company’s prospects depend on their ability to “quickly learn the automotive industry.”
  • The document reveals : “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.”
  • The company admits that it has an image problem: “The automotive industry, particularly in the U.S., is very competitive, and our competitors have been very successful in persuading customers that previously purchased our products to purchase their vehicles instead as is reflected by our loss of market share over the past three years. We believe that this is due, in part, to a negative public perception of our products in relation to those of some of our competitors.”

Inexperienced management, poor financial controls and a negative public perception don’t seem to constitute a foolproof recipe for success. But there’s much more to the recitation of risk factors, including the fact that even after the stock offering the U.S. government will remain by far the company’s largest shareholder.

GM reminds potential investors that its bailout came with some strings attached. For one thing, the company is supposed to take steps to maintain its U.S. workforce at or near existing levels. If GM is a shining example of a renaissance of American manufacturing, as some observers would have us believe, it shouldn’t be a problem to maintain jobs in the USA, especially in light of the concessions that members of the United Auto Workers union consented to in order for the bailout to proceed.

But GM’s management hints that it might be interested in even cheaper labor abroad. The S-1’s summary of the company’s current business strategy includes the following:

Enhance manufacturing flexibility. We primarily produce vehicles in locations where we sell them and we have significant manufacturing capacity in medium- and low-cost countries. We intend to maximize capacity utilization across our production footprint to meet demand without requiring significant additional capital investment.

That sounds like a plan to expand foreign rather than domestic production. Elsewhere the company seems to be complaining when it notes that the federal government “may have a greater interest in promoting U.S. economic growth and jobs than other stockholders of the Company.”

GM’s management also bemoans the fact that “restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives.”

In other words, the new GM is beginning to sound a lot like the old GM: blaming unionized workers for problems caused by management failures and market conditions. And like its predecessor, the new GM seems to be itching to dump more of those workers in favor of cheap labor abroad. This may be the main reason it is so eager to bring the federal role to an end.

If cost cutting on the backs of workers — rather than real innovation and competent management — is to be the focus of the new GM, it will probably end up in the same mess as its predecessor.

The investor excitement about the new GM may be good news for the federal government, but it could turn out to be just another market bubble.

Final irony: one of the big beneficiaries of the GM initial offering is Goldman Sachs, which in July agreed to pay the feds $550 million to settle charges of having deceived investors. Goldman is making about $9 million as one of GM’s underwriters.

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.