OT: Hostess Brands Liquidating

Sheriff Buford wrote:And I JUST WANT A TWINKIE!!!

WHY HOSTES AND NUMEROUS COMPANIES LIKE IT GO BANKRUPT: LBOs

The Forbes article referenced states "Hostess has been sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger." This is the mark of the Leveraged Buyout industry.

A 'private equity investment firm' (like Bain Capital) will use borrowed money from investment banks (contributing about 5% of their own funds) to buy a targeted, usually financially healthy, established company. They will then use the assets of the company purchased (never the assets of the 'financial sponsor' i.e., buyer) as collateral to borrow more money (thus putting the acquired company into massive debt with no actual benefit to the company purchased).

Think about that for a moment. Why would a company that is financially healthy or struggling take on massive debts (using its own assets for collateral) in order to buy itself and pay others massive fees for the privilege. No sane employee or manager with a conscience would agree to such an arrangement. Yet since the 1990's it's happened ever more frequently.

This is because the managers who agree to the deal are thinking of short-term gains for themselves and short-term shareholders; not the long-term viability of the targeted company, long-term shareholders, and the customers, suppliers, employees, and the related benefits to the community hosting the business.

The investment firm will use the money borrowed employing the acquired company's assets to pay off their debt to acquire the company, pay themselves back their 5% invested and a profit, plus 'management fees' (which are often ongoing); the senior managers and board members of the acquired company all given financial rewards (some in the form of 'golden parachutes'); and the banks providing the funding and their staff involved all take juicy fees.

The purchased company is then left with a massive debt that they can only pay off by cutting back on products or services, and input costs including labor.

The Forbes article adds that "Hostess Brands’ management gave themselves several raises, all the while complaining that the workers who actually produced the products that made the firm what money it did earn were grossly overpaid relative to the company’s increasingly dismal financial position."

WINNERS & LOSERS
There is no doubt that style of investment practiced by Bain Capital and its rivals generates massive profits in the short term for those directly connected to the LBO. The question is, who reaps those profits, and who suffers from the ultimate demise of the companies from the debt they've been saddled with. If your goal is to have a financially secure company that will grow and generate modest profits over the long-term you are likely to be disappointed.

In our current system, there is no one to ask whether a LBO is beneficial to the long-term health of the business, its employees, suppliers, customers, and hosting community. For the health of society and communities everywhere, I think this needs to change.

During the 1990's magazines like The Economist promoted this form of business practice by repeatedly stating that 'debt is good for business' as it 'keeps management on its toes'. This is clearly a misrepresentation that simply serves the elites who promote such deals.

The debt forced on these companies is only good for the LBO companies, the managers who benefit from such actions, the bankers (unless the company goes bankrupt), and short-term shareholders. Rarely do such actions seem to help the targeted companies in the long run. Typically such (now hugely indebted) companies must sell off profitable divisions to pay off the debts accumulated in their name by the investment company that purchased them.

Mergers financed through LBOs tend to often do poorly as corporate cultures often fail to mix. The result is that the merged company can often be worth less than the two separate companies. Especially after various divisions are sold off to pay for the massive debt foisted upon the companies by the LBO.

If such companies go bankrupt, the losers are the employees, the regular shareholders, the suppliers, customers, and local community (who benefit from purchases made by employees) — but rarely those involved in setting up the takeover (including the top management): they typically make off like bandits.

And somehow all this remains legal.

REFERENCE:

INFO - LEVERAGED BUYOUT (First LBO in January, 1955)
http://en.wikipedia.org/wiki/Leveraged_buyout

INFO - BAIN CAPITAL (LBO Operations begin in 1990's section)
http://en.wikipedia.org/wiki/Bain_Capital

ARTICLE - CRC HEALTH GROUP (A Bain Capital Acquisition)
http://www.salon.com/2012/07/18/dark_si ... n_success/

ARTICLE - BAIN CAPITAL BUYS PROFITABLE US PLANT, SHIPS IT TO CHINA
http://boingboing.net/2012/08/13/bain-c ... ble-a.html

ARTICLE - FORBES (Who Killed Hostess Brands and Twinkies)
http://www.forbes.com/sites/helaineolen ... -twinkies/"

Sheriff Buford wrote:And I JUST WANT A TWINKIE!!!

BlackSpinner wrote:And here is another analysis and remember that the educational system, especially Charter schools are being seen as the next target:

Think about that for a moment. Why would a company that is financially healthy or struggling take on massive debts (using its own assets for collateral) in order to buy itself and pay others massive fees for the privilege. No sane employee or manager with a conscience would agree to such an arrangement. Yet since the 1990's it's happened ever more frequently.

This is because the managers who agree to the deal are thinking of short-term gains for themselves and short-term shareholders; not the long-term viability of the targeted company, long-term shareholders, and the customers, suppliers, employees, and the related benefits to the community hosting the business.

And somehow all this remains legal.

VikingGnome wrote: They are hard to find. They fly off the shelf and LITTLE DEBBIES only makes them from Thanksgiving to XMAS. So I'm already watching for them. I've never found them at Wal-Mart but Kroger almost always has them each holiday season.

Slinky wrote:
Another article I saved and stashed and can't find had to do w/the "creative financing" and tax abatements provided for the building of these big shopping malls that are "the rage" and then start losing "tenant stores" and end up closing or almost empty shells as the initial "developers" and subsequent "owners" sell out and the tax abatements run out. In our area we have one large mall currently being bull-dozed under, another that has been pretty much stripped w/some remodeling to encourage new tenants, yet another that is starting to have trouble holding tenants and many vacant stores and one that is still booming and adding on.

gomer wrote:Great post BlackSpinner ...

The average American is mostly clueless about so many things its sickening and most of mainstream US media tends to feed the sheeple garbage.

BlackSpinner wrote:And here is another analysis and remember that the educational system, especially Charter schools are being seen as the next target:

WHY HOSTES AND NUMEROUS COMPANIES LIKE IT GO BANKRUPT: LBOs

The Forbes article referenced states "Hostess has been sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger." This is the mark of the Leveraged Buyout industry.

A 'private equity investment firm' (like Bain Capital) will use borrowed money from investment banks (contributing about 5% of their own funds) to buy a targeted, usually financially healthy, established company. They will then use the assets of the company purchased (never the assets of the 'financial sponsor' i.e., buyer) as collateral to borrow more money (thus putting the acquired company into massive debt with no actual benefit to the company purchased).

Think about that for a moment. Why would a company that is financially healthy or struggling take on massive debts (using its own assets for collateral) in order to buy itself and pay others massive fees for the privilege. No sane employee or manager with a conscience would agree to such an arrangement. Yet since the 1990's it's happened ever more frequently.

This is because the managers who agree to the deal are thinking of short-term gains for themselves and short-term shareholders; not the long-term viability of the targeted company, long-term shareholders, and the customers, suppliers, employees, and the related benefits to the community hosting the business.

The investment firm will use the money borrowed employing the acquired company's assets to pay off their debt to acquire the company, pay themselves back their 5% invested and a profit, plus 'management fees' (which are often ongoing); the senior managers and board members of the acquired company all given financial rewards (some in the form of 'golden parachutes'); and the banks providing the funding and their staff involved all take juicy fees.

The purchased company is then left with a massive debt that they can only pay off by cutting back on products or services, and input costs including labor.

The Forbes article adds that "Hostess Brands’ management gave themselves several raises, all the while complaining that the workers who actually produced the products that made the firm what money it did earn were grossly overpaid relative to the company’s increasingly dismal financial position."

WINNERS & LOSERS
There is no doubt that style of investment practiced by Bain Capital and its rivals generates massive profits in the short term for those directly connected to the LBO. The question is, who reaps those profits, and who suffers from the ultimate demise of the companies from the debt they've been saddled with. If your goal is to have a financially secure company that will grow and generate modest profits over the long-term you are likely to be disappointed.

In our current system, there is no one to ask whether a LBO is beneficial to the long-term health of the business, its employees, suppliers, customers, and hosting community. For the health of society and communities everywhere, I think this needs to change.

During the 1990's magazines like The Economist promoted this form of business practice by repeatedly stating that 'debt is good for business' as it 'keeps management on its toes'. This is clearly a misrepresentation that simply serves the elites who promote such deals.

The debt forced on these companies is only good for the LBO companies, the managers who benefit from such actions, the bankers (unless the company goes bankrupt), and short-term shareholders. Rarely do such actions seem to help the targeted companies in the long run. Typically such (now hugely indebted) companies must sell off profitable divisions to pay off the debts accumulated in their name by the investment company that purchased them.

Mergers financed through LBOs tend to often do poorly as corporate cultures often fail to mix. The result is that the merged company can often be worth less than the two separate companies. Especially after various divisions are sold off to pay for the massive debt foisted upon the companies by the LBO.

If such companies go bankrupt, the losers are the employees, the regular shareholders, the suppliers, customers, and local community (who benefit from purchases made by employees) — but rarely those involved in setting up the takeover (including the top management): they typically make off like bandits.

And somehow all this remains legal.

REFERENCE:

INFO - LEVERAGED BUYOUT (First LBO in January, 1955)
http://en.wikipedia.org/wiki/Leveraged_buyout

INFO - BAIN CAPITAL (LBO Operations begin in 1990's section)
http://en.wikipedia.org/wiki/Bain_Capital

ARTICLE - CRC HEALTH GROUP (A Bain Capital Acquisition)
http://www.salon.com/2012/07/18/dark_si ... n_success/

ARTICLE - BAIN CAPITAL BUYS PROFITABLE US PLANT, SHIPS IT TO CHINA
http://boingboing.net/2012/08/13/bain-c ... ble-a.html

ARTICLE - FORBES (Who Killed Hostess Brands and Twinkies)
http://www.forbes.com/sites/helaineolen ... -twinkies/"

JeffL wrote:Twinkies Get Reprieve: Hostess, Union Agree to Mediation Reuters

Hostess will enter private talks with its lenders and leaders of a striking union to try to avert the planned liquidation of the company.

Death of Twinkies on hold as judge tries to save Hostess jobs

http://finance.yahoo.com/news/hostess-l ... 17329.html