Excerpts
JIM LEHRER (Newshour): Now: a second story about the investment business, this on private equity firms and the companies they buy.
"NewsHour" economics correspondent Paul Solman explains. It's part of his ongoing reporting on Making Sense of financial news.
PAUL SOLMAN: New York City's Times Square, where tourists still flock, despite a terrorism scare this spring.
But business reporter Josh Kosman is spooked by incendiary devices of a different kind, debt bombs, especially from companies like these that were taken over by private equity firms. Kosman, who has written a book on private equity, "The Buyout of America," sees a lit fuse almost everywhere he turns, especially in Times Square.
JOSH KOSMAN, author, "The Buyout of America": Two of the four biggest record companies are owned by private equity firms, EMI and Warner Music. They both have a lot of debt. EMI's close to bankruptcy.
PAUL SOLMAN: Because it was purchased, says Kosman, with too much borrowed money, as was Clear Channel.
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PAUL SOLMAN: And the pitch is: Give us your money. We will then use that to buy a company, not putting too much of it down. We will borrow the rest. We will spiff up the company. It will be more profitable. We will sell it to other investors. We will all make out.
JOSH KOSMAN: Yes. Most of the country's pensions are severely underfunded. They need to find ways to increase their rate of return, especially right now, with interest rates near basically zero. So, they get attractive by this pitch.
PAUL SOLMAN: The problem, says Kosman, is that what private equity firms borrow, the companies they buy have to pay back. And, in the last decade, private equity has bought a huge chunk of corporate America.
JOSH KOSMAN: Since 2000, they have bought companies that employ one out of every 10 Americans in the private sector. That's about 10 million people.
PAUL SOLMAN: And many P.E.-owned, debt-ridden firms are now hurting for cash.
JOSH KOSMAN: The Boston Consulting Group last year predicted half of their companies would default. Let's say the companies that go bankrupt end up laying off a quarter of their people, a third. You know, you can easily get to more than a million people. That's a lot of people.
PAUL SOLMAN: In fact, says Kosman, half of the S&P-rated firms that went bankrupt last year, besides banks, that is, were private equity acquisitions, including Chrysler, Simmons, Six Flags, and "Reader's Digest," where retirees, including executives, had their pensions slashed by a debt-driven bankruptcy.
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JOSH KOSMAN: Permira, a London-based buyout shop, bought Hugo Boss in 2007. It paid a very high price for it. The company borrowed more than $2 billion to fund the acquisition. The credit crisis happens. Luxury good sales fall for everybody.
PAUL SOLMAN: Yet, behind the scenes, Permira had paid itself a $400 million dividend out of that $2 billion it had Hugo Boss borrow. As a result, says union president Bruce Raynor:
BRUCE RAYNOR, president, Workers United: They look around to cut costs and they find a factory in Cleveland where they are paying workers the princely sum of $12 an hour. The workers have health care and a pension, a few paid holidays, and can live. And they decide, we can find workers who can make that for less.
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PAUL SOLMAN: It is the M.O. of many a private equity firm, says Bruce Raynor.
BRUCE RAYNOR: They leverage a company, put much too much debt on the books of the company, making the company long-term unstable. They take money out of the company. They squeeze the company in ways that hurt it.
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PAUL SOLMAN: And, yes, sometimes, the deals work, says Bruce Raynor, as with Blackstone's purchase of Hilton Hotels.
BRUCE RAYNOR: Debt, in my view, is not, in and of itself, a bad thing, if that -- if the borrowed money is used to build the business. It's when the debt is used to enrich a handful of private equity partners, like in the Permira case, that's when it's dastardly.
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PAUL SOLMAN: But the main danger, says Kosman, is that the firms bought in profligate private equity deals now owe so much, they threaten the economy as a whole.
JOSH KOSMAN: Seven hundred billion becomes due between 2012 and '15. It's a lot of money. And in that period, 2012 to 2015, the government is going to have to refinance on its own about $800 billion. Investment grade companies, better rated than these guys, are going to have to repay about $1.2 trillion. So, you have a huge debt wall coming in this country, and these guys will be at the bottom of the list, because these are the companies that are the weakest.
PAUL SOLMAN: But private equity owes just 2 percent of all the debt in America, Doug Lowenstein insists.
DOUGLAS LOWENSTEIN, Private Equity Council: The economy is dynamic. The economy is improving. As the economy improves, companies are stronger. And these firms are in much stronger shape.
PAUL SOLMAN: But, at least for now, Hugo Boss will still be making suits in Cleveland, because the unions' Bruce Raynor worked out a deal.
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PAUL SOLMAN: The workers, however, who used to average $12 an hour, will now make $10, $10.20 next year, $10.40 in 2012, while the company continues to pay back the $2 billion Permira borrowed to buy it, for the workers, a costly victory to pay off debt they never incurred.
Applicable name for private equity firms, Robber Barons.
The rich get richer and the working stiff gets shafted. Welcome to GOP sponsored America.
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