Excesses of private equity put mattress firm on death bed
Excesses of private equity put mattress firm on death bedTHE WORKERS at Simmons Bedding Co. should have stashed some extra money under their Beautyrest mattresses. But they couldn’t have known that their solid, stable company would fall prey to a Boston-based buyout firm, and become a poster child for the shocking excesses of the leveraged-buyout industry. In a devastating example of how many private equity firms soak up big profits from companies without much concern for their long-term fate, Thomas H. Lee Partners and other private equity firms took in millions from the Atlanta-based mattress business. Now, Simmons is drowning in debt, and 1,000 of its workers have lost their jobs. Lee Partners, The New York Times recently reported, borrowed against the mattress company’s assets to pay its own investors $238 million in dividends in 2007 alone. (Lee himself had left the firm in 2006.) The partnership raked in about $77 million in profits from Simmons before putting it up for sale when the recession hit. It paid Simmons’ chief executive, Charlie Eitel, handsomely - and one year, even kicked in $92,000 for his yacht captain. In the meantime, heavy borrowing by a succession of owners has saddled Simmons with $1.3 billion in debt. The company had to lay off more than a quarter of its workforce last year and is filing for bankruptcy. Private equity firms introduce risk into the financial system by their nature. The Obama administration has proposed rules that would require the firms to register with the Securities and Exchange Commission so it can monitor their risk-taking. Such a measure would be useful, but further steps are needed. The government should adjust the federal dividend tax rate to give buyout firms an incentive to stay invested in companies longer, rather than quickly ducking out after paying their investors. And private equity firms’ fees - the cuts they take as managers of investors’ money - should be taxed as income rather than at the low capital gains tax rate they now enjoy. The golden era of big buyouts is over for now, but the pain is still being felt by workers who had little recourse against private equity firms that stripped their companies of assets during the credit bubble. Lee, a philanthropist who has given handsomely to Harvard University and other local institutions, has started a new private equity fund. One hopes he will extend his charitable spirit to the workers of the firms he takes over. Nonetheless, Congress and financial regulators should do all they can to end the cozy system in which the very richest investors reap huge profits while passing on all the risks to bondholders and a company’s workers.  2009 The New York Times Company |
