I do not like the actions of many in “private equity.” I am a big fan of capitalism. I just object to those that unjustly take from the other stakeholders involved. It is not the specific facts of this case, that I see as important, but the thinking behind these types of actions. Which specific actions are to blame for this bankruptcy is not my point. I detest that financial gimmicks by “private capital” that ruin companies.
Those gimmicks that leave stakeholders that built such companies in ruin should be criticized. It is a core principle that I share with Dr. Deming, Toyota… that companies exist not to be plundered by those in positions of power but to benefit all the stakeholders (employees, owners, customers, suppliers, communities…). I don’t believe you can practice real lean manufacturing and subscribe to this take out cash and leave a venerable company behind kind of thinking.
How Private Equity Strangled Mervyns [the broken link was removed]
Much of the blame for its demise lies with three private equity titans: Cerberus Capital Management, Sun Capital Partners, and Lubert-Adler.
When those firms bought Mervyns from Target for $1.2 billion in 2004, they promised to revive the limping West Coast retailer. Then they stripped it of real estate assets, nearly doubled its rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves, according to the company. The moves left Mervyns so weak it couldn’t survive.
Mervyns’ collapse reveals dangerous flaws in the private equity playbook. It shows how investors with risky business plans, unrealistic financial assumptions, and competing agendas can deliver a death blow to companies that otherwise could have survived. And it offers a glimpse into the human suffering wrought by owners looking to turn a quick profit above all else.
This plan has been repeated over and over, for decades. People buyout a company, strip off huge amounts of cash for themselves, leave the company in extremely precarious position by piling on all sorts of debt which kills cash flow. This is even taught in business schools as how things should be done (although I think many business schools have cut back on promoting this type of behavior). The attitude of some is: “look at this silly company, they are not leveraged, go buy them take a bunch of cash out and they might actually stay in business for the long term, but what do we care about that we can get a bunch of cash now and pay ourselves millions who cares what happens to all those (employee, suppliers, customers…) that build up the company.”
In this case in addition to piling on all sorts of debt the buyout firm split off the real estate from the rest of the company and then doubled the rent charges – adding another cash flow drain on the company.
Cerberus also bought out Chrysler and now seeks billions from the government to help them out.
Related: CEOs Plundering Corporate Coffers – Why Pay Taxes or be Honest – Constancy of Purpose – Respect for people
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Managing Passionate Employees
Passion vs. Productive
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Managers want passionate employees, but don’t always know how to manage them. Passionate employees question things, probe and push. Who’s got the time to deal with that? Productive employees get things done. No questions asked.
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if you align someone’s passion with their job description—you just might boost your department’s productivity.
Passionate employees are often not the easiest employees to manage. If a manager confuses ease of managing with best employee they discount the value of a passionate employee. And they often do confuse the two values. A passionate employee can seem like a bother, not willing to just go along but constantly challenging and pushing for new ideas.
One of the things that great managers do is to understand the value of passion and make the extra effort to cultivate and support those passionate employees. Even if occasionally they just want that person to just do their job and stop being so different. The great manager realizes that treating everyone the same is a very bad meme that somehow seems to have taken hold in many people’s mind. People are not the same. Managing a system of people is not the same as maintaining a machine.
A managers job is not to make their own job as easy as possible. When the system is best served by an extra passionate employee, then the manager needs to support that employee. And smooth out others that might get annoyed (often others find the passionate employee should just be like everyone else).
Related: Enhancing Passion of Employees – Don’t ask employees to be passionate about the company! – Signs You Have a Great Job … or Not – Joy in Work – Software Development