For many years, Harry and David, Inc. was the pride of Medford, Oregon. Out of nowhere they built a nationwide mail order business to sell those fleshy, red and green Comice pears that grow so well in Oregon’s cool climate. I love those pears and relished the occasional Harry and David Gift basket.

       During harvest season, Harry and David was a major employer of locals who would pick pears as a second job. Conservatively run, Harry and David always made a good profit for their shareholders as well.

     In fact, Harry and David was so profitable that a New York private equity fund –Wasserman- decided to buy them in 2004. Wasserman did not want to actually pay for the entire company, however, so they purchased it using  “leveraged buyout” financing. This means that Wasserman paid $82 million of its own money but borrowed the rest of the $232 million purchase price from big time banks using Harry and David’s assets – mainly its income flow – as collateral.

      So when the LBO was completed, Wasserman was the primary owner and Harry and David now owed 20 million a year in interest payments as privilege for their ownership. It didn’t take long before the 2008 recession killed Harry and David’s cash flow but they still owed those interest payments.

    By early this year, the writing was on the wall – they could not pay their debts and only bankruptcy could keep the company operating. So that is what they did yesterday, filing for Chapter 11. Maybe they will emerge from bankruptcy some day, maybe not. But bondholders and creditors will take a major haircut, many employees will be canned, the seasonal hires will be cut way back, and shareholders will be effectively wiped out unless there is a recovery.

      But wait you say – Wasserman will suffer the same pain as their $82 million investment is probably wiped out. Ah, but remember the rich are different from you and me, or at least smarter. Wasserman paid itself a $100,000 million “special dividend” shortly after the purchase. So the very guys who caused the bankruptcy will make about $20 million off their investment. And they don’t even like pears anyway.

       And its all legal. The price of a free market is that sometimes the market eats its young. Yet the likelihood of an LBO killing the acquired company is so foreseeable that this is one place where government regulation really is needed.

gift basket. So I assume you believe all LBOs are inherently bad. Can you tell me the bankruptcy rate for companies that were bought out by private equity vs all bankruptcies? Unfortunately the media only tells us of the failures and not the successes.

From what I've read, it looks like this company was doomed long ago. Maybe the LBO just accelerated the process. In reading the article, five key points stand out. First, they moved away from its core competency to sell other stuff. Second, opening brick and mortar stores when their product is better positioned to selling over the internet. Third, why are their stores in outlet malls considering what they are selling is high end. Fourth, what they sell is discretionary. Mix it with a recession and the results aren't going to be good. Fifth.....$4 PEARS!!!! I don't care if these are the best fucking pears on planet Earth. They are just pears. Though I would love to be in the executive suite listening to the execs saying consumers will buy our $4 pears.

Harry and David has been sold and bought a few times before the LBO. Weren't they acquired back in the 1980s by RJR Nabisco, then acquired by Yamahouchi Pharma. Go figure on a Japanese pharma company buying a boutique discretionary company. This looked like a disaster waiting to happen, and maybe, only maybe, the LBO just accelerated what was going to happen anyway.  



-- Modified on 3/29/2011 8:48:39 PM

The fact that Wasserstein paid himself back his $82 million plus a 25% ROI ($19 million) using supposedly borrowed money is probably what seems the most egregious aspect. What’s not told is whether or not Wasserstein was essentially the only or main holder of equity. This was all done in 2005 when cash flow seemed much more liquid and they were paying big bonuses all around, well before the hard times hit.

So what sort of regulation is needed to protect against piss poor management?

pillaged main street for the past 20 years. In northwest California up in the Redwood country another company was ruined by Wall street called the Pacific Lumber Company. good post.

The number of calls coming in wasn't great even then. When I was hired, I expected to be inundated with calls every day starting at six in the morning (pacific time).

Then they started asking people to sign up for early dismissal. The few times I did so there were just enough calls that I thought I'd be sent home just after lunch - but sometimes I was sent home after only three hours of work. One day I signed up - and was sent home within the hour. (If you signed up for early dismissal, they wouldn't let you change your mind.) When the season was finished, I was given an employee discount for the entire year.

Then, in early 2010, I got a notice that stated the Eugene call center was completely shut down. I could keep my discount, but there wouldn't be a 2010 season in Eugene. All calls would be at the main place from then on.

I didn't think too much about it at the time; my providing business was taking off about then. It was in August 2010 though that I started hearing local rumblings that things weren't going so well for the company.

So, sad as it is, it isn't really surprising.

that someone on the Board was actually a victim of this financial travesty and lost their job.

     Sounds like you did not work there long enough for pension benefits to vest. But, if you did, you should note that they are trying to dump their pension obligations in the bankruptcy.

forgiving of these corporate raiders.

    Sure, with any bankruptcy you can fault business decisions unrelated to the LBO but do the math - $20 million in interest payments off the top for six years and a $100 million in a "special dividend."  If the company was "doomed long ago," why the hell pay a special DD? Clearly the controlling SHs were looting the corporation.

     That is $220 million right there directly attributable to the LBO.

      On the BR filing date, Harry and David reported nearly $200 million in debt.  Give me back the $220 million attributable to the LBO and Harry and David is not even insolvent.

    "maybe, only maybe, the LBO just accelerated what was going to happen anyway?"   Are you sticking with that?


    And I personally will send you a Harry and David gift basket next year if UCLA makes the NCAA tournament. BTW congrats on getting a another Carolina reject - Larry Drew - he's a great teammate.

We have a tax system that rewards wealthy people for stripping wealth from the companies they own and enriching themselves. This is why we need to raise taxes on capital gains and on top marginal income tax rates. It would give these people the incentive to invest in their companies instead of divesting them.

True, "most" LBOs do not play a material role in driving the target into bankruptcy.  But, unless the acquirer brings in a top flight management team to replace the old team, or provides financing the target could not get anywhere else, I seriously doubt that the LBO creates any value for the target company or its employees.

     While your point about the predictable cash flow is well taken, equally important is the price paid for the target. BC of tax advantages LBO raiders usually can pay more than other buyers. In the case of Federated Dept stores, for example, the acquirers paid way too much and drove the company into bankruptcy.

     And LBOs are considered so undesireable that many companies have "poison pills" in their corporate structure to provide a defense to hostile takeovers.

I don't think so. Public companies use "poison pills" to prevent hostile takeovers, but I assume most, if not all, of the stock in this privately held company was held by a few individuals. If anyone is screwed today it's Wells Fargo, and as a result the good people of Medford.

"Barbarians at the Gate" - a great book. It's been a long long time since I read it. When I read your OP, I didn't initially see the connection of H&D acquisition by RJR Nabisco in 1986, and the subsequent LBO of Nabisco, hence the book.

I'm just not sure what type of regulation you're advocating, except maybe a maximum level of assumed debt. My main point was that the H&D business model was flawed (is still flawed) way before the LBO.

Yeah yeah I read about Drew yesterday. Don't know much about him except he is a local boy. Add Drew to the Wear Brothers. Maybe SoCal kids have a problem living in Tobacco Road vs Manhattan Beach. I know which choice I would make.

Things are totally different, since there has been change and hope.  I think the guys selling apples are the targets now.  Fuck those apples.

You'll find most LBOs actually work, so long as the most basic principle of this type of deal is followed:  the business must have a very predictable cash flow through good times and bad, in order to service the debt.  Most LBOs operate privately for a few years, the principals take their payout, and the company is IPO'd again.

-- Modified on 3/30/2011 5:57:52 AM

but it shows one small example of how to manage a business into oblivion. They have a call center and at least one distribution center. Volume is light and unpredictable. They have fixed costs associated with both centers. What would I've done? Yep, outsource it. No, not to India or anywhere outside the U.S. but to a 3rd party that has extensive experience, i.e. Accenture, IBM, HP in business process outsourcing with facilities in places like Utah, Nebraska, etc. Objective is to move from a fixed cost structure to a variable cost structure. Pay for only the calls handled, and products shipped.

Did it say specifically in the article that H&D were going to dump their pension on the PBGC?

link. Of course, this is just a proposal and is subject to approval by the bankruptcy judge but come on St. Croix what about clawback from Wasserman?

     Two special dividends amounting to a $100 million dollars? If you are right that the handwriting was on the wall for this business model, then the special dividend was looting of corporate assets pure and simple if not a fraudulent transfer. I would go after the sellers as well - remember they got $232 million - except I believe there is a safe harbor preventing clawback from them.


     And btw the PBGC is subrogated to the company's rights against Wasserman - so I predict they are reviewing a fraudulent transfer or looting action as we speak. If not we need to put Irving Picard in charge.

re value creation:  the only purpose of an LBO is to create value for the sellers and the buyers.  That's it.  To the extent that employees have an ownership position, they benefit, too.

Ever heard of Frank Lorenzo, Carl Ichan, Myron Davis, the Braniff Brothers?

My previous job had laid off several of us due to Eugene's fallen economy. I was literally just starting out as a provider and so didn't have much going on there yet. Working for H&D gave me just enough to get through the six weeks of holiday before my providing status improved. I didn't expect to work for them every year like so many others did.

I just didn't expect them to implode like this.

Texas International Airlines, National, Continental, Eastern. He had his hand in a lot of airlines back then. He makes Scott Walker look like an angel when it comes to unions. Could you even imagine him and the unions today? Plus he mastered the art of bankruptcy. He was an asshole. Let me just get that out of the way.

I used to love flying on the old Continental DC-10s. They used to have the pub in the sky. I have some great stories from that era. I worked in the airlines business for a few years right after college before moving to the hi-tech industry.

Thanks for reminding me how old I am.

can use poison pills - which is really just a term for a special shareholder rights plan to prevent a hostile acquisition - just as well as public companies.

     Check out how Craigslist (3 shareholders) dealt with EBay tp prevent EBAy from  selling its stock by adopting a poison pill.
The pill was set to be triggered if eBay attempted to sell its block of stock to another party; and thus, in effect a new transfer restriction was imposed on eBay’s stock.

of that old Steve Miller song lyrics, "Go on, take the money and run". He did that very often, and very well. How did he ever manage to not get killed by the union brothers, Vinnie, Guido, Sal, or Cleavon from Newark or LaGuardia? Someone did drop a bowling ball from a small plane through the roof of his home, right into the bedroom. He wasn't home at the time. Too bad.

He put the "douche" back in "fiduciary."