January 23, 2012
The Pursuit of Shareholder Wealth
One of the last deals Drexel Burnham Lambert closed before it was forced into bankruptcy was the debt issuance for a petrochemical company called Rexene Corporation. The gist of the transaction was this: Rexene issued $500 million in bridge financing that it used to pay a special $7 per share dividend. Essentially, the company borrowed a ton of money simply to pass the cash on to shareholders. None of it went for for plant expansion, R&D or any other production purpose. In terms of a corollary, it was like a man taking out a second mortgage—jeopardizing the well-being of his family—in order to pay for a mistress’s boob job.
When I heard about the deal in one of our morning meetings, I asked a simple question: Who are the shareholders? I was treated with disdain for asking it, but I remained persistent. Finally I was told that 80% of Rexene’s shares were held by three trusts. As far as I was concerned, that wasn’t much of an answer, either. Eventually I learned that the primary beneficiary of the trusts was Drexel! In other words, the investment bank was causing a manufacturer it owned to go into debt—dangerously so, as is evidenced by what happened later—in order to pay Drexel half a billion dollars. As alarming as that may seem, it gets worse: Within two years, Rexene sought Chapter 11 bankruptcy protection due to its excessive debt load and employee layoffs resulted. It should also be noted that no part of the transaction was deemed illegal. It would still be legal today. In fact, similar transactions occur all the time.
This is the kind of capitalism that many who wish to protect the interests of Wall Street want to perpetuate. Why do plants shut down and pension benefits evaporate? It often happens when someone with a spreadsheet and a mandate to further enrich the moneyed class, recognizes that the breakup value of a company exceeds its stock price. A process is then put in motion that’s meant to serve only one constituency. In the search for the last damn buck, Bain Capital and others of its ilk cancel pension benefits in order to raid assets meant to support retired employees. It’s not capitalism, but a cancer.
Someone recently left a comment about one my blogs, saying the notion that a rising tide lifts all boats is a truism. Really? Well, tell that to the collateral damaged workers of our nation who have suffered most from our lust for efficiency. Who gains from plant closings that inevitably occur in the holy wake of enhancing shareholder value? Not the people who lose jobs. Not suppliers to the plants. Not the communities that are decimated. The beneficiary is Wall Street. Then we add insult to injury by telling the moneyed class that they can pay a lower tax rate on their investment returns than the percent paid by those who’ve lost their working-class jobs. If we’re experiencing class warfare, the first atomic bomb was dropped by the 1%, who discovered a range of ingenious ways to steal from the middle class and have learned to protect their positions by paying off politicians.
In this context, why would the majority of us vote for anyone who supported such a system? And why would we trust someone who spent most of his adult life in search of the last damn buck? I don’t fault people for their successes—unless, of course, their successes came at the expense of others. No matter how cleverly the process is decorated, it’s theft and only an ignorant public would find it laudable. There are things more important than Return on Investment that Wall Street can’t be made to understand. In fact, a maniacal focus on metrics such as ROI and ROE are primary reasons for a decline in the quality of our lives.
In my next blog, I plan to write about that last point and the problem of economic externalities.
Posted by Alan Bahr