The Nightmare at Beautyrest

In our world almost anything can become a commodity.  Still it came as something of a shock to read in Sunday ’s New York Times how the Simmons company, a producer of some of our most comfortable commodities, was turned into a commodity itself and sliced, diced and mangled in the process.

The story in brief:  Simmons, the manufacturer of Beautyrest mattresses, announced it will file for bankruptcy protection, “as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades.”  The Times goes on:  “But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise….

“Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.”  On the other hand, the Times points out, this is devastating news for its employees, bondholders and other investors.  (See “Buyout Firms Prospered as a Company’s Debt Soared.”)

As citizens of our society, we tend to think that companies are primarily in business to produce goods and services that are useful and fairly priced.  At the same time, we are dimly aware that, for the financial industry, businesses are commodities themselves – to be exploited as much as possible for the financial gains they offer to those who buy and sell them, break them up, recapitalize them, and sell off their assets.

Private equity firms can determine if the business is over-priced or under-priced, has disposable assets, significant liabilities, is a good candidate for a takeover, and so forth. And, indeed, huge sums of money can be made by leveraging the assets of such companies, as the Simmons case illustrates.  Usually the rest of us do not grasp what is going on behind the scenes, though we read about the acquisitions and sales, the name changes and mergers. The owners reap windfall profits, often ending up placing the companies in extremely exposed and vulnerable positions.

It would be like a home-owner who uses his home to back an equity loan to buy another home, strips it, and then sells it to someone else.  Or a tenant who renovates extensively and manages to charge the home itself for the cost.  Home-owners, alas, cannot do that – as we have learned again and again.  They are stuck with the expense and the loss.

In considering reforms to our financial industry, we might want to consider such forms of abuse, costly to employees, communities that accommodate businesses, as well as other investors who find themselves empty handed at the end of the process.  But first we have to wake up to the fact that the producers of commodities become commodities themselves for an industry that often has little regard for their intrinsic value.