The implicit promise of the original leveraged buyout kings, and the private equity firms and hedge funds that have descended from them, was this:
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We may cause some pain and disruption, but the result should be a more productive, dynamic economy than existed under the complacent boards and CEOs we replaced at the commanding heights of business.
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But even as a revolution has taken place in how corporations are governed and capital allocated, the results for the overall economy have been the opposite. Productivity growth is weaker than it was in the heyday of flabby conglomerates. Business dynamism is down.
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So what went wrong? It could be a coincidence, of course. Research suggests PE buyouts do increase productivity of an individual firm, at least over the first couple of years. Maybe the economy would be in even worse shape if not for the rise of the financial engineers.
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But at a minimum, the rise of financialized control of American business hasn’t created the surge of economy-wide productivity and dynamism that its enthusiasts have predicted.
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To try to figure out went wrong, I went to Topeka to understand what went wrong at a company that has really been through the wringer of financialized control: Payless Shoesource.
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The retail industry is famously in disarray, and the company had lots of problems when one private equity group took over in 2012.
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But the strategy that ownership group pursued, of paying out $352m in dividends during a two-year period after buying it—141% of operating profits in that span!—left it uniquely vulnerable to bad news.
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That’s why a slowdown at West Coast ports in the runup to a key selling season—the kind of bad luck that can affect any business—led it on a path to bankruptcy in 2017.
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Coming out of Chapter 11, the company had purged many debts and bad leases. But some combination of legacy problems and operational mistakes by new hedge fund owners who had little experience in the retail industry— put it back in bankruptcy 18 months later.
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In the 2019 bankruptcy, it liquidated its US stores, putting 16,000 people out of work. The former corporate headquarters in Topeka is now a husk of its former self (the company just recently emerged from bankruptcy and a third ownership group is now attempting to relaunch).
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Studying this one troubled company, here are my lessons: Often, financialized control means putting in place capital structures that are not appropriate for the long-term success of a company.
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And the supposed masters of the financial universe frequently don’t have some magical insight into how to steer corporations better than the seasoned people, often with less-than-glamorous jobs in less-than-glamorous towns—who actually run the companies.
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So here’s the full story. I hope it provokes a worthwhile discussion about who steers capital and governs Corporate America, and what those choices mean for the economy as a whole.https://www.nytimes.com/2020/01/31/upshot/payless-private-equity-capitalism.html …
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