simmons: fire players suck the life out of a real company

[jk]

Profits for Buyout Firms as Company Debt Soared



....
Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.
For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.
But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.
Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.
How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.
Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.
But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”....


http://www.nytimes.com/2009/10/05/bu...immons.html?hp

[cjppjc]

Re: simmons: fire players suck the life out of a real company

Great history there. Thanks jk.


BTW: Does this seem criminal in any way?


Twice after buying Simmons, THL borrowed more. It used $375 million of that money to pay itself a dividend, thus recouping all of the cash it put down, and then some.

[Anon21456]

Re: simmons: fire players suck the life out of a real company

That's just ugly !!!

[don]

Re: simmons: fire players suck the life out of a real company

Great history there. Thanks jk.


BTW: Does this seem criminal in any way?.

A common, and bread and butter, exercise of organized crime is "busting out" a legitimate business. When the owner becomes indebted to the wise guys in some way, all his built up credit, equity, etc. is pushed as far as it can go until all credit is cut off. Sound familiar?

[goadam1]

Re: simmons: fire players suck the life out of a real company

The same thing happened with Hertz.

The best part is in the companion article. The guy who "ran" the company for private equity is Charlie Eitel. He named his monster yacht, "Eitel Time."

Douchebaggery.

[Slimprofits]

Re: simmons: fire players suck the life out of a real company

Is this basically the plot from the movie Wall Street?

http://www.thlee.com/ourTeam/index.html

A few ex-Goldman and Morgan Stanley people on that list.

The web of interlocking directorates is extensive.

[MulaMan]

Re: simmons: fire players suck the life out of a real company

Wharton, Harvard or Columbia MDA - Masters of Debt Administration.

[Milton Kuo]

Re: simmons: fire players suck the life out of a real company

Profits for Buyout Firms as Company Debt Soared



....
Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.
For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.
But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.
Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.
How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.
Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.
But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”....


http://www.nytimes.com/2009/10/05/bu...immons.html?hp

Interestingly enough, another mattress manufacturer, Sealy (ZZ), is also heavily burdened with debt -- a reminder of the cost of all the management "expertise" provided by its previous private equity owners (First Boston, Drexel Burnham Lambert, Bain Capital). The hollowing-out of what are usually perfectly fine companies using these LBO tricks is so old that I'm a bit surprised nothing has been done to stop this highly unethical practice.

This brings to mind a computer game, Sid Meier's Railroad Tycoon, that I used to play in 1990 or thereabouts that in retrospect did a surprisingly good job of modeling how LBOs really work. In the game, you could buy a majority of your competitors' stocks and then transfer the company's cash to your company. After looting your competitor of his cash, you would sell just enough stock so that you no longer had a controlling stake. The competitor would then be independent and, lacking cash, would take out a loan from a bank. Upon being recapitalized, you could quickly buy enough company stock to again take a controlling stake in the company and clean out the coffers. Lather, rinse, repeat until the company can no longer service its debts from its operations and is thus considered untouchable by the banks, declares bankruptcy, and disappears from the game (make sure you liquidate all stock before it hits zero ).

Another interesting side effect of this mini-game within the main game of building a railroad empire is that you could achieve a monopoly without ever having built a true railroad. I remember being able to win the game quite regularly having only built maybe 100 miles of track and not even having any trains. This also mirrors Wall Street's impact real-life on the United States -- a lot of wealth is transferred, absolutely nothing is created, and otherwise useful companies are destroyed.

One final, disturbing (perhaps prophetic) note about the Railroad Tycoon. Upon ending the game, you would be rated on your performance based upon your company's net worth and its dominance of the railroad industry by giving you a numeric score and job title. Despite only having built 100 miles of track and preventing my competitors from really building anything either, I would end the game with the highest job title in the game: "President of the United States of America." :eek:

[Down Under]

Re: simmons: fire players suck the life out of a real company

BTW: Does this seem criminal in any way?

Sure sounds criminal to me; but, I'm sure it's all legal and legit in the good old US of A. Unfortunately, probably legal and legit down here, too.

What a sad state of affairs.

[jk]

Re: simmons: fire players suck the life out of a real company

Interestingly enough, another mattress manufacturer, Sealy (ZZ), is also heavily burdened with debt -- a reminder of the cost of all the management "expertise" provided by its previous private equity owners (First Boston, Drexel Burnham Lambert, Bain Capital). The hollowing-out of what are usually perfectly fine companies using these LBO tricks is so old that I'm a bit surprised nothing has been done to stop this highly unethical practice.

This brings to mind a computer game, Sid Meier's Railroad Tycoon, that I used to play in 1990 or thereabouts that in retrospect did a surprisingly good job of modeling how LBOs really work. In the game, you could buy a majority of your competitors' stocks and then transfer the company's cash to your company. After looting your competitor of his cash, you would sell just enough stock so that you no longer had a controlling stake. The competitor would then be independent and, lacking cash, would take out a loan from a bank. Upon being recapitalized, you could quickly buy enough company stock to again take a controlling stake in the company and clean out the coffers. Lather, rinse, repeat until the company can no longer service its debts from its operations and is thus considered untouchable by the banks, declares bankruptcy, and disappears from the game (make sure you liquidate all stock before it hits zero ).

Another interesting side effect of this mini-game within the main game of building a railroad empire is that you could achieve a monopoly without ever having built a true railroad. I remember being able to win the game quite regularly having only built maybe 100 miles of track and not even having any trains. This also mirrors Wall Street's impact real-life on the United States -- a lot of wealth is transferred, absolutely nothing is created, and otherwise useful companies are destroyed.

One final, disturbing (perhaps prophetic) note about the Railroad Tycoon. Upon ending the game, you would be rated on your performance based upon your company's net worth and its dominance of the railroad industry by giving you a numeric score and job title. Despite only having built 100 miles of track and preventing my competitors from really building anything either, I would end the game with the highest job title in the game: "President of the United States of America." :eek:

you post is both very amusing and very insightful. and very frightening, and really - in content- very annoying.

[jk]

Re: simmons: fire players suck the life out of a real company

james kwak, at baseline scenario, points out something interesting:

....most of the time, a company is worth more as a long-term going concern than as a piggy bank to be broken open. So even if there is only one shareholder, the rational thing is to invest in the company’s long-term health, not to borrow absolutely as much money as possible and stuff it in your pockets. (THL’s returns on the deal, though positive, are far below what they would like to see from an investment.)

But what if there is only one shareholder, and the company is not worth more as a long-term going concern? Let’s say you know the market for your product is going to implode, and you know you can make more money by borrowing money to stuff in your own pockets than by running the company for the next ten years and then selling it. Then the rational, shareholder value-maximizing thing to do is precisely to load up on the debt and pay yourself off.

http://baselinescenario.com/2009/10/...ers/#more-5156

[karim0028]

Re: simmons: fire players suck the life out of a real company

james kwak, at baseline scenario, points out something interesting:






http://baselinescenario.com/2009/10/...ers/#more-5156

Its kind of like any homeowner maxing out his HELOC before planning on defaulting In the end he/she is a "company" with a single share holder and he/she is just maximizing share holder value as the long term value of his/her investment is tanking....

[Chris Coles]

Re: simmons: fire players suck the life out of a real company

Now you can see why I decided to describe the present financial system as a Feudal Mercantile economy, not capitalist.

In my free download PDF book, The Road Ahead from a Grass Roots Perspective, in chapter 10 The Fulcrum for Change, I describe where I believe this new business paradigm started, way back in 1964.

You may download it here: www.chriscoles.com/page3.html

Since placing the book up as a free download, I have had a great time posting comments on The Times, London web site. They have let me name the book three times and the high point was their placing my single comment up last Saturday aimed at the IMF conference in Istanbul.

http://business.timesonline.co.uk/tol/business/economics/article6859447.ece

[santafe2]

Re: simmons: fire players suck the life out of a real company

Simmons’s woes, said Scott A. Schoen, a co-president of the firm who sat on Simmons’s board, are entirely caused by the “unprecedented and unforeseeable” downturn...

Yup...who could have known?