Note: I started out to write a short post on the demise of Hostess Brands Inc. But Good God Almighty!!! What I learned while doing research for this post made my skin crawl. And to think they are blaming the unions for their problems?!? NOT HARDLY! It’s the same story we’ve heard before, only on steroids: GREED!!
On Friday Hostess Brands Inc. announced they would be shutting down the 87 year-old company. While they have made some “by the way” references to other problems the company has, they and the media is trying to lay the entire blame for their demise at the feet of the unions; in particular, the bakers union. But there are many things they are conveniently ignoring and those have little to nothing to do with unions.
“Hostess has been sold at least three times since the 1980’s, racking up debt and shedding profitable assets along the way with each successive merger.” They filed for Chapter 11 bankruptcy in September 2004. Led by Ripplewood Holdings (two-thirds ownership), a private equity firm (Romney-like venture capitalist), they came out of bankruptcy in February 2009, at which time the name “Hostess” came into being. Three years later in January 2012 they filed for bankruptcy again.
Oddly enough, when the company came out of bankruptcy in 2004 it was with more debt than before filing. Later one investor would say “If you look in the dictionary at the definition of throwing good money after bad, there should be a picture of Hostess beside it.”
“…in the 1980s the first generation of “masters of the universe” demanded higher returns on investment, and Hostess was sold to Ralston Purina. Ralston was drunk with power, at the same time adding Eveready Batteries to their all too diverse portfolio that included Chex cereals and snack as well as pet foods and livestock feeds. Ralston dragged Hostess HQ from Rye, NY to their St. Louis compound in da ‘hood and went on a binge of closing bakeries. After bleeding Hostess of a couple dozen bakeries with no improvement in Hostess’ financial health, Ralston engineered a merger with a joke of a bakery chain known as Interstate Brands. The abusive marriage to Interstate went bad from the start, with more bakery closings. That disaster was eclipsed by an even bigger one when Interstate tried to force a chemically “enhanced” bread down customers throats that had a shelf life measured in weeks. Bakers sampling the bread said it tasted like something unprintable and customers soon joined the chorus of complaints. But Interstate didn’t care, and as they tried to jam there chemically “enhanced” bread down customer’s throat’s, customers spent their money elsewhere in the bread aisle. Within months Wonder Bread slipped from the number one sales position it had held for decades to third place. Interstate quietly dropped the chemical enhancement, closed more bakeries, and filed for bankruptcy in 2004.” [bold added]
after before filing for bankruptcy earlier this year, “[Hostess] actually tripled its CEO’s pay, and increased other executives’ compensation by as much as 80 percent.”
“BCTGM members are well aware that as the company was preparing to file for bankruptcy earlier this year, the then CEO of Hostess was awarded a 300 percent raise (from approximately $750,000 to $2,550,000) and at least nine other top executives of the company received massive pay raises. One such executive received a pay increase from $500,000 to $900,000 and another received one taking his salary from $375,000 to $656,256.” [bold added]
After the bankruptcy filing in 2004, union members were asked to make concessions with promises of a better future. The union agreed:
“[Union] members across the country have taken dramatic wage and benefit concessions and watched as 21 Hostess plants were shut down and thousands of jobs lost. At the time of the first bankruptcy, Hostess workers were assured by management that money saved via concessions or plant closings would help make the company stronger, more vibrant, and more competitive. Instead, helpless Hostess employees watched as money that was supposed to go towards capital investment, product development, plant improvement and new equipment went to executive bonuses and payouts to the hedge funds that own Hostess Brands.” [bold added]
In 2009 union members once again made concessions in order to help the company emerge from bankruptcy. Unions gave up $110 million in labor cost, and thousands of members lost their jobs. But other venture capitalist entered the picture, taking a chunk of Ripplewood’s ownership; making the future of Hostess even bleaker (Ripplewood later became a bigger shareholder by pumping more money into the company, but has now been relegated to a non-factor).
By late 2011 the company was in deep trouble again. In January of this year, Hostess, after having their creditors say no to help, once again asked unions for more concessions. But remembering the promises made and not kept in 2004 plus what they gave up in 2009, the union declined in an effort to force the venture capitalist to change their greedy ways. But they would not.
In February of this year the union found out that Hostess had asked the bankruptcy Judge to grant CEO Brian Driscoll $1.5 million in salary plus $2 million in cash incentives and long-term incentive compensation. The agreement also guaranteed Driscoll $1.95 million if Hostess liquidated. When the union chased down Driscoll and challenged him, the company backed away from the request but only after Driscoll left one month later.
Hostess Brands never stood a chance of survival after 2004. In fact, you could probably go back to the 1980’s. Even without a union presence, the company would have failed. Why? The greedy venture capitalists’ ways of doing business – the very same way former Presidential candidate Mitt Romney does.
UPDATE: PoliticusUSA also has a great article today on how “Vulture” Capitalist took down Hostess.
Never underestimate the difficulty of changing false beliefs [with] facts.
Economist Henry Rosovsky