Tuesday, October 6, 2009

Simmons Beauty Rest: A Critique of Private Equity

In yesterday's NYT (here), Julie Creswell tells the sad story of Simmons Bedding Company, which plans to file for bankruptcy in the next few weeks.

Creswell's piece is well-reported: she has plenty of details about the economics of the M&A world, but she also includes snapshots of the human characters (including a private equity titan, a laid-off employee, and the company founder) whose actions and decisions collectively tell a "corporation's" story (reminding me of John Steinbeck, in The Grapes of Wrath, writing about "The Bank" but also telling the individual human stories of the Joads and others).

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Creswell argues that Simmons's troubles illustrate a widespread pattern of abuse (I don't think that's too strong a word - she is quite critical) by the private equity industry. The pattern goes something like this:

  1. A private equity firm purchases a company at a premium during the boom years

  2. The private owners then overleverage the acquired company, using the new debt to pay themselves hefty dividends

  3. Ultimately, the acquired company has such a massive debt load that it can no longer sustain profitable operations
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Zalmon Simmons founded Simmons Bedding in 1876 after "coming across" (Creswell's words - it sounds like he did not, himself, invent the technology) a new machine that could mass produce mattresses. Over the decades, the company grew into one of the largest players in the mattress industry.

Thomas H. Lee Partners bought Simmons in 2003 for $1.1 billion (of which $745 million was debt- financed), then refinanced twice and withdrew much of the company's equity (in the form of dividends to themselves). The dividends, combined with fees, have enabled THL to make a $77 million profit while the company's fortunes have cratered.

Incidentally, Thomas H. Lee's claim to fame was flipping Snapple to Quaker Oats for $1.7 billion (having paid only $130 million two years earlier). I remember the Snapple story from when I was in college -- it was told as one of the examples of how private equity firms could contribute to economic growth and dynamism.

Longtime employee Noble Rogers tells a sad story of Simmons's management having no sympathy for him or other employees (approximately 25% of all employees) who were laid off. The sources at THL blame the economic downturn for Simmons's problems and absolve themselves of responsibility. Creswell relies on the numbers to counter THL's explanation, but Noble Rogers describes what happened in more straightforward terms:

“They stopped the picnics. They stopped the Christmas parties. They stopped the retirement parties,” he recalled. “That showed you the type of people I was working for. I just didn’t realize it until the hard times came like they did.”

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