Give Me Your Tired (Old Ideas)

The New York Times had a great article about the Simmons bankruptcy. It took me back to 1986, when I was working as a sell-side research analyst, and I read about the $600 million LBO of Ohio Mattress. Ohio Mattress was itself a roll-up of lots of small mattress makers, and the company eventually became Sealy. As I heard our analyst recount the numbers, it seemed unbelievable to me that so much debt could be piled on a business that put padding on coiled springs and covered them with fabric.

Fast forward to 2009, and we read about the bankruptcy of Simmons. T.H. Lee & Partners makes a cool $90 million on their investment, but, for the record, is "disappointed." Banks have made fees and padded their earnings. Bondholders are out $575 million; "apoplectic" should appear in their press releases. Finally, the employees who dutifully went through all the changes that generated the higher cash flows required to pay off THL were rewarded with cake at their holiday parties and now have nothing. Warren Buffett, who has no aversion to making money, has railed at the private equity paradigm in his shareholder letters for years. This kind of "looting" (a term used in an academic article from 1994) is now called "financial innovation."

Ares Capital Management, the new owners, will benefit from wiping out creditors and bondholders and the cycle starts again. The bondholders, though, have only themselves to blame, as they were apparently told that the use of proceeds for the various debt issues were to pay special dividends to the owners and not to bolster the long-term earnings power and sustainability of the enterprise. Which of our compassionate political parties speaks for the employees?