Too Many Cooks Spoil the Livelihoods of Thousands
BusinessWeek (12/6/2008) did a great job of dissecting of what went wrong in the collapse of U. S. retailer, Mervyns (see "What Have You Done to My Company"). The subtitle of the story pretty much sums up the disaster “How private equity firms stripped department-store chain Mervyns of its assets and threw 18,000 people out of work”. If you are a tech entrepreneur who has a heart and also has dreams of selling the business, you need to read this piece.
The article also tells of the disappointment that Mervyns’ founder, Mervin Morris, feels concerning the recent events. I’ve seen some business founders really struggle with whether they should sell their firm to a third party. There are issues when you sell to:
- a major competitor – They may want to take your firm/products out of the market. As soon as the deal is done, they’ll force your customers to adopt their solution. Many of your long-time employees will be cut loose and others will find very little of the old firm’s values, culture, etc. to survive in the new company.
- a venture-backed firm – These owners always have an exit plan in mind before they buy your firm. They may want to structure an exit in 8 months or 8 years but regardless of the timing, they will flip it and probably sooner than you think.
- a private equity firm – Like a venture firm, these companies are also looking to flip a deal but they’ll couch it in more glamourous terms like “We’ll be seeking opportunities to unlock hidden asset values”. Translated: “We’ll sell off the crown jewels of this firm, load it with debt, pay ourselves a huge dividend/distribution for stripping the firm bare and then high tail it out of here”
- a consolidator – These firms like to snap up or roll-up a number of related firms, eliminate ‘operational inefficiencies’ like redundant back office personnel and R&D, and then re-sell or IPO the big combined firm. But, they’ll likely saddle the combined firm with a lot of debt and pay themselves a special distribution for their efforts.
A good friend of mine took over the helm of his family owned firm when he got out of college. After 25 years or so of this, he looked into selling the firm to a private equity firm. After spending millions on the potential deal, he began to realize that the new owners wouldn’t share the family’s values. In fact, he learned that the new owners would cut wages and head count to make the company attractive to another buyer. Even though the family would have made a fair bit of coin out of the deal, they passed as they knew this deal would quickly end the livelihoods of scores of long-term employees. The deal would benefit no one but the private equity firm and the family would have to live with the guilt of damaging the lives of employees.
What’s remarkable about the Mervyns story is this line from the BusinessWeek article:
Creditors soon approached Goodman with an oddi idea: On behalf of Mervyns he should sue the private equity owners who had seemingly run the company into the ground. As the CEO, they reminded him, it was his fudiciary responsibility to preserve as much of the company’s value as possible.
This a great piece of journalism. Also check out this related BusinessWeek link