28 July 2018

Different Sorts of Maggots

In looking at the mass layoffs at the New York Daily News, Mike the Mad Biologist explains just how private equity firms like Bain Capital make their money, and the answer is, "Looting."

In an online discussion, JR noted that, "A bit of creative destruction is a good thing.  If you compare the business cycle to ecology, there's a purpose to death, decay, the carrion eaters. It's all part of the cycle of life. ……… Never mind that they're now packing assault rifles for the express purpose of creating more carrion to eat. This is not balance, this is chaos and there will be a reckoning."

My response was that you have to draw a distinction between maggots.

The green bottle fly maggot eats only dead tissue, and has proven an effective therapy for hard to heal wounds, while the screw worm maggots, specifically that of Cochliomyia hominivorax,* eat only living tissue, and has been the subject of eradication efforts around the world for their devastating impact on livestock.

He has a list of the techniques involved:
  1. Buy off the existing management.
  2. Buy a majority stake in the company.
  3. Cement your control of the company by putting your own guys in charge.
  4. Move jobs to Mexico, China, etc. earning the adoration of Wall Street.
  5. Change the return assumptions of the pension plan, and transfer money back to the company as returned earnings.
  6. Borrow a f%$# load of money.
  7. Because of the above, you profit numbers look good, so issue huge dividends to the owners, primarily the PE firm, but also the old board members.
  8. Go public again.
The net result is that the Mitt Rmoneys of the world make a lot of money, and a company is public with an unsustainable (or nearly unsustainable) debt load, and devastated communities.

Mike notes that this is what has happened with the Daily News and what has happened to Univision, where viable companies are destroyed by looting.

It's also why "New Democrat" style politics and economics no longer have support of the Democratic Party base:
Note to ‘centrist’ New Democrats: this is one reason why part of your base, the part that ten to twenty years ago called it self ‘liberal’ or ‘progressive’, is now radicalized and increasingly calling itself ‘social democratic’ or ‘socialist’ (AAAAAIIIIEEEE!!!). When people lack agency, including economic agency, they get angry–because anger is the appropriate emotion.
The behavior of PE firms, and the behavior of the "centrist" Democrats are what used to be called, in a more innocent era, "Eating your seed corn".

It may have taken a while, but the reckoning is coming.

*My apologies to Cochliomyia hominivorax maggots for comparing them to Mitt Rmoney. This is for illustrative purposes only.


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