The story it tells isn’t new. But a recent article in The Nation did a good job of describing the way in which hedge fund ownership has contributed to the demise of so many companies that have been household names for decades.
The model is to take over a company by loading the acquired company up with debt, recouping costs by selling off valuable assets and cutting staff and new investments to the bone, even added new debt financed by the hedge fund, which in turn collects fees and interest from the captive company. And employees are too often left out in the cold.
See: “Hedge-Fund Ownership Cost Sears Workers Their Jobs. Now They’re Fighting Back.”
If you don’t have a subscription, you’re able to read a few articles before running up against The Nation’s paywall.
Here’s an excerpt from the article describing what happened after a hedge fund controlled by Eddie Lambert took over Sears.
Lampert bought Kmart in 2003 and merged the two companies in 2005. He came into ownership of both with basically no experience in retail; his background was in risk arbitrage at Goldman Sachs. To buy Sears and Kmart, Lampert, through his hedge fund, used the private-equity model of a leveraged buyout: He financed the purchase of those companies by saddling them with debt and using little of his own capital. Once he became a retail CEO, he stuck with the Wall Street playbook. He sold off Sears’s most valuable assets, such as the Lands’ End clothing and Craftsman tool brands. Many business lines ended up in separate companies that he has invested in through his hedge fund and profited from as Sears withered. Lands’ End, for instance, is now worth more than Sears. He also sold off a cluster of Sears stores for $2.7 billion to Seritage, a real-estate company that he headed as chairman. Sears then had to pay rent at many of those locations.
Meanwhile, Lampert’s hedge fund loaded the company up with debt through loans it issued itself, making money off commissions and interest. ESL and its affiliates lent Sears some $2.6 billion—about half the total debt it had as of September—earning $400 million in interest and fees. All those losses, all that debt, and all the rent it was paying on its stores left the company little to invest to keep up with Walmart and Amazon.
The newspaper industry is still suffering through the same impacts brought on by hedge fund investors.
But here’s my question. Hawaii hotels have also been a favorite investment for hedge funds. How have they fared in the process? Have these hotel investments followed the hedge fund strategy outlined by The Nation?
It seems to me that’s a story that is begging to be researched and written.
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I wondered why Sears sold off the Craftsman tool line. While they weren’t as tough as the Snap-On brand, they cost less and featured a similar lifetime warranty.
Sounds like there was nothing fundamentally wrong with Sears. Rather it was the victim of an economic parasite.
As the old saying goes, there ought to be a law.
A historical look back on these type of hedge fund buyouts: The Airlines were the first one’s to really get socked with this buyout procedure. You remember Texas Air and, later on, Carl Ichan, literally bought the airlines on debt and tore them apart for the valuable pieces, leaving the carcass of the company as it headed toward bankruptcy. Airlines have gotten smarter about that so you don’t see that type of action anymore. I think for the hotels, there is a different dynamic in that the pieces have been so melded together in a hotel corporation that just breaking them apart would be like taking pieces out of a puzzle and then trying to draw the whole puzzle again based on that one piece. For hotels, they have made their structure so cohesive that every piece creates the whole, break apart the pieces and no matter how you try to rearrange the piece, it will never give you the maximum profit of the whole.
An example closer to home was how Hawaiian Telcom was blown up.
As a former Hawaiian Tel employee I know too well. When we were GTE things were great, then we became part of Verizon there were changes not for the better. Somehow the Hawaii branch didn’t get the same bells and whistles improvements to the business that the Mainland branches did. When Verizon sold us to Carlyle (George Bush) they took the lucrative government contracts and a good portion of HI tel employees pension with them. Then proceed to charge millions to Carlyle for the software program the HI tel used because Carlyle didn’t think to include that as part of the sale. All the while management kept telling the rank and file it was progress. We lost our reputation and standing in the community, and we as a state lost a company that provide good pay jobs with a pension and a future. In recent years things have changed for the better but it will never be what it once was.
KSSK and the Clear Channel Group experienced that under Bain Capitol and Mitt Romney. They left Clear Channel with an $19,000,000,000 debt.