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I read this pretty good explanation on another forum I frequent:
" I have been working professionally in highly levered finance for almost 25 years so I know how it works. PE firms make their money by levering up companies many of which are not profitable enough on an unlevered basis to make sense (i.e., they're not worth buying with just equity capital because the returns are not competitive). They then do some combination of stripping out costs and boosting revenues, and yes one of those costs is probably labor. But the key to the whole thing is not to drive the companies into bankruptcy because the private equity is last in line to get paid in bankruptcy and will probably be 100% wiped out (in a portfolio where they promise investors 15-20% returns on average, a 100% loss is very bad). If they get it wrong and go into bankruptcy, they will try to preserve some of their value but probably won't succeed in getting much. The fees they earn before bankruptcy are a tiny part of the equation (unlike the MSM's spin). If a PE firm drove its companies into bankruptcy too often, its lenders would not lend so the deals would not happen. One can argue that nobody should ever try to get a return with leverage, and that barely profitable companies should keep people employed as long as possible as their number one goal, but those are topics for another day. Bain and all its ilk simply are not what they were portrayed to be during the election season. They are neither a charity nor evil. And their investors tend to be state and private pension plans because their returns are good, thanks to NOT driving companies into bankruptcy too often.
Hostess and unions, to me, is a well worn tale of human nature on both sides, echoing the auto companies. Companies have life cycles, they are not perpetual. Some get reinvented, a la Madonna, multiple times, some don't. A successful company gets a union (or many) and can afford to pay them. The union's job is to maximize that pay, while the management's job is not to pay them too much. Every few years, the negotiation happens again. Now here's the key: any management team will give a little more than they want to prevent a crippling strike or permanently bad relations. That's human nature - wanting to resolve conflict and keep heading down the road, living for today. Do that at every negotiation, and over 20-30 years that little bit too much becomes a millstone. As the company's lifecycle turns down (nobody thinks Twinkies are good for you anymore), the inherent arithmetic of available profit margins comes home to roost: a snack company can never make more than, say 15% margins without new competition driving down margins. So when revenues turn down, the fixed cost element of the equation does not turn down, and the company loses money. It tries all levers to save money, often borrowing money to try new things because the equity market won't fund that bad story, but ultimately needs labor concessions. Unions are not in the business of giving concessions, or cutting pension benefits that were promised in better times. Eventually, the business dies, even if management is talented and not greedy, because they just can't get past the cost issue (which at this point includes leverage). Neither side in that story is evil, they're just too focused on the right now to see (and adjust their expectations for) the waterfalls ahead.
As for management getting bonuses, the number may be too high, but it does not cause the problem - take that extra $1.5MM or $10MM and divide it by 18,500 workers. Doesn't keep the lights on.
If a buyer shows up for the brands and the factories, they will demand lower labor costs in order to make a decent but not huge profit. It's arithmetic. And BTW, the profit required to take a gamble and buy Hostess is larger because the unions are so hard to deal with.
Bottom line: neither good nor evil on either side, just the inevitable result of passing time, the nature of business, and the nature of humans."
same old tired liberal talking points. executives taking pay raises. Guess what even if the executives didn't take the raises they still would have went out of business, because they .were still paying too much for labor. Unions jack everything up. They were needed at one point in time(turn of the century, when the government had little power and coal barons treated the men like slaves) those days are gone. We have a all too powerful central government, that keeps tabs on every little thing in the private sector. No need for unions now. Make no mistake these Union morons slit their own throats. Don't worry though. The brand will be sold, and some other bakery will soon start turning out non-union Twinkies
Labor costs had less to do with it than a bad product that few were buying anymore. Labor took 37 percent cuts in the last bankruptcy and the next year execs give themselves 80 percent raises. That's absurd. Explain to me how this is economic equilibrium? The union wasn't asking for anything other than lower paycuts. There was no pension left.
Just ask yourself, when is the last time you had a Twinkie? What parent lets their kid eat that stuff these days?
I agree it's not smart to give executives of a failing company such a big raise, but it looks like the "executives" mentioned is only about 9 people (Hostess Blames Union For Bankruptcy After Tripling CEO's Pay | ThinkProgress). The CEO got a $1.75M raise, and I'll be conservative and say that 9 others got $500K each, and that's a total of just over $6M. As getatag's quote alluded to that's about $325 for each of the 18,500 workers.
Yes, giving the executives large raises certainly did not help the company, but they did specifically say that if the workers agreed to the contract then they'd still be in business and 18,500 would still have jobs...
I agree it's not smart to give executives of a failing company such a big raise, but it looks like the "executives" mentioned is only about 9 people (Hostess Blames Union For Bankruptcy After Tripling CEO's Pay | ThinkProgress). The CEO got a $1.75M raise, and I'll be conservative and say that 9 others got $500K each, and that's a total of just over $6M. As getatag's quote alluded to that's about $325 for each of the 18,500 workers.
Yes, giving the executives large raises certainly did not help the company, but they did specifically say that if the workers agreed to the contract then they'd still be in business and 18,500 would still have jobs...
It's a convenient way of pushing the blame onto the union. They can say whatever they want. The product was bad. Mismanagement plagued the firm and made the union much less likely to agree to the terms.
A couple of the articles I've seen the union president is quoted as saying the last time they made "significant concessions" was in 2004. No, I don't know what those were, but after 2004 there was this thing called a recession...
A couple of the articles I've seen the union president is quoted as saying the last time they made "significant concessions" was in 2004. No, I don't know what those were, but after 2004 there was this thing called a recession...
They made significant concessions after the first bankruptcy in 2009, then again more recently. Overall the bakers took 32 percent cuts. The corporation had made years and years of poor decisions. Now the folks at the top see an easy way to cash out while scapegoating their employees. Believe me, their severance packages will be nice.
They may have made concessions since then, but doesn't sound like they were significant (although again I'm not exactly sure what "significant" means).
Quote:
Hurt, the union president, said the strike was necessary because workers were “not willing to take draconian wage and benefit cuts on top of the significant concessions they made in 2004 and give up their pension so that the Wall Street vulture capitalists in control of this company can walk away with millions of dollars.”
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