Private Equity Fund Would Rather Shut Down a Plant Than Pay Its Workers a Fair Wage

By Art Levine, AlterNet. Posted July 10, 2009.

That's just another illustration of what unions see as the broken labor-law system they hope to repair with the Employee Free Choice Act. Byrnwood is filing appeals to the full NLRB board (now with only two members), and then can appeal the decision to federal courts.

In Monday's announcement, the company seemed to say it would obey the order, since it is going to close the plant before a final NLRB ruling is issued. "There was little reason to risk a continuing back-pay award when the Bronx facility will be closed before any decision is expected from the full Board," the company said.

Closing the plant in the Bronx is the final step in an array of corporate strategies designed to squeeze as much money as possible from the bought-out company. Private-equity investors expect average returns as high as 25 percent after a company they purchase is resold, and some equity firms promise a 40 percent return.

Yet before Stella D'Oro's announced closing, a spokesman for Byrnwood had insisted to AlterNet that the fund's decisions were driven just by financial reality, not greed: "It's still a money-losing business because the [labor] cost structure simply isn't competitive for the business we're in."

Byrnwood bought Stella D'Oro at the "distressed" price of $17.5 million in 2006 from Kraft, which had bought it from the dismembered RJR-Nabisco company memorialized in the book and movie, Barbarians at the Gate.

To union critics, Byrnwood's executives are, essentially, the new barbarians. Their hard-nosed, illegal bargaining stance and harsh decision to shut the plant illustrates the powerful new role of private-equity companies in undermining workers' rights, job security and middle-class living standards. It also reflects, critics say, the weakness of a federal tax policy that actually encourages rapacious takeovers and current labor laws that don't protect employees from such abuses.

Peter Rossman, the IUF's communications director and one of the world's leading authorities on private equity's impact on labor, has said, "Stella D'Oro is a microcosm of what's been happening in corporate America for the past two decades -- and what urgently needs to be fixed."

Rossman says private-equity firms are growing increasingly powerful while displaying virtually no commitment to long-term investment in the companies they acquire; they're just interested in short-term resale profits.

In a new report, "A Worker's Guide to Private Equity," Rossman says, "To generate these short-term super profits, private-equity funds have aggressively undermined the foundations of collective bargaining built up over decades of union struggle."

A key to what Rossman argues is their destructive approach to investment is their use of leveraged-buyout strategies. They borrow heavily to take over companies and then load up that debt to be paid off by the companies they acquire, rather than by their own firms.

Between 2000 and 2007, he reports, 3,000 U.S. companies with a value of over $1 trillion were acquired by private-equity funds. They also indulged in the risky short-term investment instruments that have helped wreck the world economy as part of their "casino capitalism."

(A spokesman for Byrnwood wouldn't disclose Stella D'Oro's debt obligation and dismissed as "unsupported speculation" and "nonsense" the concerns that the cookie company had to drain its revenues to pay off debt.)

As always, these so-called smart guys are using other people's money, and, whether in private or public companies, generally paying themselves back handsomely in dividends, fees and share buybacks rather than investing in the companies they acquire. "You buy it, you strip it, then you flip it," Rossman says.

Even worse, federal tax policy actually promotes such destructive investing that can cost hundreds of thousands of jobs. Criticizing the "unlimited [tax] deductibility of interest" paid in leveraged buyouts, Rossman observes, "This massive regulatory subsidy, which encourages financial pillage while costing taxpayers billions of dollars in lost public revenue, is an open invitation to poison the books. As long as company balance sheets are forced to assume the burden of their own buyout, and saddled with colossal debts, workers like those at Stella D'Oro will be forced to pay the price."

The Obama administration is proposing taxing the salaries of equity fund executives at a higher rate, but it's not touching this devastating loophole that drives the buyout schemes, Rossman notes.

Clearly, then, the Stella D'Oro strike is more than just another strike at a plant, and far more is at stake.

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Art Levine is a contributing editor of the Washington Monthly and writes on labor and political issues for In These Times and the Huffington Post.

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