www.businessweek.com/magazine/content/08_49/b4111040876189.htm
Video: Q&A with Paul Capital Partners' David de Weese Morris, founder of Mervyns at the site of the original store in San Lorenzo, Calif. Eric Millette The site of the original store in San Lorenzo, Calif.
As the retail chain's founder walked into the rust-colored concrete building, scores of shell-shocked employees were shuffling out with boxes full of their personal effects. Dozens rushed up to tell Morris, 88, how much they had enjoyed working at Mervyns. As Morris walked past a lunch room, some 70 workers rose to give him a standing ovation. Mervyns, the chain that Morris founded six decades ago with $25,000 and two employees, is about to disappear. More than 18,000 people have been thrown out of work--without severance and, in many cases, weeks of vacation pay--amid the toughest job market in a generation. Mervyns, a midrange seller of apparel, housewares, and other department-store fare, might have weathered the economic storm that's battering so many of its rivals. Much of the blame for its demise lies with three private equity titans: Cerberus Capital Management, Sun Capital Partners, and Lubert-Adler.
Then they stripped it of real estate assets, nearly doubled its rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves, according to the company. Mervyns' collapse reveals dangerous flaws in the private equity playbook. It shows how investors with risky business plans, unrealistic financial assumptions, and competing agendas can deliver a death blow to companies that otherwise could have survived. And it offers a glimpse into the human suffering wrought by owners looking to turn a quick profit above all else. BUYOUT SHOPS GONE WILD Private equity firms buy companies with the goal of improving them and then selling them for a profit. To pay for their deals, they often take on debt, hence the term leveraged buyout. In recent years the buyout shops went wild, taking advantage of unusually low interest rates and easy borrowing terms. At their peak in 2006 they acquired 667 companies worth $372 billion.
When the credit crunch hit, lenders pulled back and dealmaking ground to a halt. Debt-heavy companies were left unable to refinance just as the economy was slowing. The optimism and confidence of the buyout boom gave way to fear--and massive layoffs. What's happening at Mervyns is happening elsewhere at an alarming rate. While private equity firms control just a tiny fraction of US corporations, their companies are disproportionately troubled. Of the 105 big US companies that have filed for bankruptcy this year, 66 have been owned by buyout shops or been spun off by them, according to Capital IQ, another unit of McGraw-Hill. Investors, meanwhile, remain skeptical of many of the recent buyouts that haven't yet blown up but soon could. Loans made for those deals are now trading for as little as 33 cents on the dollar.
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