Tuesday, December 17, 2013

Rebuttal to Sun Media column on company closures and layoffs

Last week Larry Cornies examined the rash of plant closures that have battered the economy of Southwestern Ontario. The London Free Press columnist slipped in one of his core business beliefs when he made the following claim: Companies — whether it’s Libby’s, Ford, Heinz, Kellogg or U.S. Steel — all act in the strategic interests of their shareholders or investors — It's their imperative, he tells us.

Mr. Cornies may be wrong, as any long-time investor in the stock market knows all too well. My guess is Mr. Cornies is well aware his position here is questionable. That is why he tries to slip his claim quickly by his readers. He makes no mention of the growing number of experts who believe the "shareholder value imperative" is a myth — a common one, an oft repeated one, especially in the media, but a myth just the same.

An entire book has been written addressing this very subject — The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public by Lynn Stout, a Distinguished Professor of Corporate & Business Law at Cornell University Law School in Itaca, NY.

Ms Stout wrote in an article published by the Utne Reader and posted online:

If we stop to examine the reality of who "the shareholder" really is — not an abstract creature obsessed with the single goal of raising the share price of a single firm today, but real human beings with the capacity to think for the future and to make binding commitments, with a wide range of investments and interests beyond the shares they happen to hold in any single firm, and with consciences that make most of them concerned, at least a bit, about the fates of others, future generations, and the planet — it soon becomes apparent that conventional shareholder primacy harms not only stakeholders and the public, but most shareholders as well.

Ms Stout points out that between 1997 and 2008, the number of companies listed on U.S. exchanges declined from 8,823 to only 5,401. The Heinz Co. has now joined the growing list of public companies taken private. This a disaster for investors in the market. Retiree shareholders, like me, are especially hard hit. The cream of the investment world is being siphoned away.

Heinz was a cash cow for its shareholders. Those who bought shares in early January 2010 saw a gain of almost 39 percent in three years, and that is just share value growth. Heinz also paid an annual dividend of $2.06 at the time it was taken private .

Admittedly, Heinz shareholders saw an immediate pop in the value of their shares with the purchase of the food giant by Berkshire Hathaway and 3G Capital but it was a one time event. To a great extent, Heinz is now a private cash cow.

Nebraska-based Berkshire Hathaway holds $8 billion in preferred shares paying a 9 percent dividend, or $720 million a year. Compare this payout to the old common-stock dividend. It only cost the Heinz Co. about $665 million.

Larry Cornies assures us that a multinational like Heinz is forced to make some hard decisions. True but Heinz was not facing any immediate hard decisions. The company was awash in $325 million free cash flow.

The hard decisions materialized when Heinz became a private multinational saddled with a lot of new and growing expenses. Heinz faced some 2000 hard decisions. That's the number of jobs cut since the company was taken private.

One big driver of the recent closures, and left unmentioned by Mr. Cornies, is greed — and greed is not good despite what Kevin O'Leary, of Dragons' Den fame, proclaims oh-so-loudly. To understand the damage caused by unbridled greed one needs to look no farther than Mr. O'leary himself.

In his memoir, Cold Hard Truth, O'Leary called The Learning Company, his patched-together business, a money-making machine. The Tuck School of Business at Dartmouth University begs to differ. According to the business school TLC had "questionable profitability" and "two of Learning Co.’s deals . . . rank among the 10 worst U.S. acquisitions during 1994-1996 as measured by shareholder value two years after the deal." According to The Globe and Mail, an SEC filing shows that TLC suffered net losses of $376 million in 1996, $495 million in 1997 and $105 million in 1998.

Erik Gustafson, manager of the Stein Roe Growth Stock Fund, a major shareholder in Mattel at the time of the TLC acquisition, is widely quoted as saying, "The present management team [at Mattel] has vaporized two thirds of the value of the company." While shareholder value was tanking, long-time Mattel workers were also suffering. 3000 lost their jobs.

So, who benefited from the Mattel financial meltdown? Kevin O'Leary for one. Bain Capital for another. When Mattel handed O'Leary his walking papers, after just months with the company, his TLC division was killing the company. O'Leary's pain of being, what some have called, fired was eased by a $5.2 million golden parachute.

Landing on his feet, O'Leary appears regularly on CBC as their business go-to-man. The Ivey Business School at Western University thinks so highly of his philosophy of greed that they have placed him on their advisory board. Does this tell you something is wrong in our accepted business model?

One can learn more about why the Southwestern Ontario region is experiencing so many mergers and subsequent closures from reading the news reports of Norm DeBono in The London Free Press and staying clear of the opinion pieces by journalism professor Larry Cornies.

According to DeBono:
A U.S. investment firm has bought and closed three London businesses in four years, shortchanging workers on severance in at least two of those businesses — and might do it again. Apparently, there are no federal or provincial restrictions in Canada that a company has to respect the law in how it treats its former workers before it can buy another business in the country. . . .
"There are laws that protect employees when there is successor-ship (another company taking over). But if a company is winding down a business, their obligations to fund may disappear," said Tim Gleason, a Toronto labour lawyer.
  • Sun Capital Partners in Boca Raton Fla in 2007 bought McCormicks in London, laying off 275 workers, refusing them severance and vacation pay and their pensions. Workers won vacation pay after a two-year legal fight.
  • In 2008 H.J. Jones Packaging in London was sold to Knight Packaging of Chicago, a Sun Capital firm. H.J. Jones was closed, cutting 45 jobs. Workers were also refused severance, but finally won a deal that gave them half of what they were owed.
  • In 2011 the year-end closure of Specialized Packaging Group in London was announced, cutting 189 jobs. It's owned by PaperWorks of Philadelphia, another Sun Capital company.

It is one thing to watch American interests close their long-time Canadian branch plants but it is quite another when an American company buys a successful Canadian business, folds it into the U.S. firm, and then closes the Canadian operation — often moving the production Stateside.

For an example of this think of Bick's. This Canadian company made pickles in Dunnville, Ontario, until the giant American company J.M. Smucker bought the operation, closed it, and moved production to Ohio.

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