The New Capitalism?

It looks like the 1980s model of the corporate raider has gotten a major upgrade, if not an image makeover. If you have a few million lying around, it’s relatively easy to turn it into a lot more money. (Yes, it still takes money to make money; that much hasn’t changed.) Here’s how:

1. Borrow lots of money and buy an undervalued firm, preferably an old-line manufacturing outfit.

2. Leverage the company’s assets to borrow a lot more.

3. Pay yourself a special dividend. If that doesn’t cover the purchase price (and your own debts), add on management fees and milestone payments if you manage to turn the company around.

4. Sell the company/assets or file for bankruptcy, since the company’s debt is now crippling. You, on the other hand, make off with a nice profit.

This practice is not only legal, but increasingly commonplace, according to the New York Times this morning. The story at the link focuses on Simmons Bedding Co. (makers of the Beautyrest mattress), who after a period of ownership by Thomas H. Lee Partners of Boston, saw an increase in revenue and profit but nonetheless wound up laying off 1,000 people last year and filing for bankruptcy.

Of course, not all private equity investors are evil goatee-wearing madmen swimming in pools of cash like Scrooge McDuck. The THL managers are appropriately conciliatory and cite the “unforeseeable and unprecedented” economic climate for the reason to go into Chapter 11.

But the reality is that more than a hundred marquee names, from Harrah’s Entertainment to Six Flags, have found themselves taken over by private equity firms lately. Add to them Northwest names like Eddie Bauer and Puget Sound Energy, and we’re talking about more than a trend; this is a new economy. One in which relatively few people will profit at the expense of their companies, their brands and their employees.

A sign of the times? Or just more of the same, writ large?