Flipping Businesses Is Like Flipping Houses

Except that even more people get hurt.

The New York Times has carried a couple of stories in the past week that really brought this issue to my attention. A week ago, the paper ran an article by Julie Creswell on the flipping of Simmons Mattress Co., and then last Friday, there was an article by Geraldine Fabrikant on the venerable Maine boat-builder Hinckley Yachts.

Simmons will soon file for bankruptcy protection, while Hinckley may yet avoid that fate. But in both cases, there was nothing wrong with the underlying businesses, only with the debt that a series of private equity firms loaded onto them.

In the case of Simmons, Creswell reports that Thomas H. Lee Partners of Boston, which bought the venerable mattress maker in 2003, "has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise."

Meanwhile, Simmons bondholders are expected to lose more than half a billion dollars, and more than one-quarter of the firm's workforce was laid off last year.

Hinckley, family-owned until 12 years ago, was hit hard by the deep recession that makes buyers less inclined to spend between $400,000 and $4 million for a yacht, but has been nearly crippled by its debt burden. This year, "for the first time since the mid-1990s, it will have a taxable loss of about $4 million." Most devastating to the small town of Southwest Harbor, Me., where Hinckleys have been built since the firm's founding in 1928, it has halved its work force from 625 in mid-2008 to 305.

At the height of the real-estate boom, there were many article decrying the greed of homeowners who flipped houses right and left for the quick cash. Flipping businesses risks devastating whole communities. It's not simply greed -- although that's certainly part of it -- but the economics schools that held that the only score that mattered in evaluating a deal was whether it enhanced shareholder value, and by how much.

Shareholder value is important, but American capitalism is at more risk from such blinkered thinking on the right as it is from any socialist political thought. A company is more than simply its balance sheet, especially in small communities like Mableton, Georgia (where Simmons had one of its factories) and Southwest Harbor, Maine.