Behind the financial maneuvering at Hostess | Hacker News Reader

Behind the financial maneuvering at Hostess

nytimes.com

62 pointsredcastle35 comments

I'm going to use just 'back of napkin' numbers to make the outcomes easier to compare and for each I'll round in ways that I assume (but might be wrong about) being more fair.

  800,000,000 : Top investment firm guy
  200,000,000 : Some random high investment firm guy?
  ___,_50,000 : Lets call this 'middle class' in a small town
  ___,_20,000 : Hourly worker: $10 / hour * 40 hours * 50 weeks

Is it really possible for any person to be worth 10000 or more times some random other person? That disparity is ludicrous and in my opinion practically slavery.

How many $10 hour workers without a financial education do you need to hire to effectively handle investments?

I'm a bit confused to why leveraging up companies this badly, without commercial need, isn't a violation of fiduciary duty of company leadership. I'm pretty sure that it'd be in several countries, e.g. Germany. You might not get into trouble without a bankruptcy, but there were one, you'd likely be personally liable to some degree.

EDIT: grammar

Fiduciary duty to who? The banks making the loans?

Well, in Germany (I've had a business there before moving to the US, that's why I know some about it), you're free to milk "your" company, but if you end up going into bankruptcy you'll likely be hold at least partially liable to the money you took out of the company, even if it's some form of limited liability company. So essentially, yes, to the banks. Not if all works out, but in the cases it doesn't. To my knowledge that's largely not the case in the US atm.

Banks in the US are free to demand personal liability that goes beyond the company if they feel the risk demands it. Of course, it's a free market, so if some banks are willing to make the loan without doing that they'll probably win the business instead.

Banks readily issue small business credit cards backed by personal assets.

That doesn't help previous creditors (including say employees, landlords, suppliers, etc), which now have to deal with a massively over-leveraged company, which is more likely to go out of business.

They are the owners of the company. The leverage is just a technique to move future cashflows in to the present so they can pay their investors and move on to the next company. Would it be better to just allow the company to go completely out of business?

If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling.

PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.

If you truly believe this leverage will force the company in to bankruptcy, you should short Hostess stock (TWNK). It's currently trading at ~$12.50 per share.

Furthermore, if you believe it is possible to save a distressed company like Hostess and generate superior returns without dividend recapitalization, perhaps you should start a competing private equity firm.

I am keeping an eye on them and considering put options. I am expecting a peak and crash within five years, but timing these things is risky.

The market can act irrationally longer than you can stay solvent. Put options are "safer" than shorting but they cost more.

While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening?

Why would an otherwise healthy company be liquidated if it couldn't service its debt? Wouldn't lenders rather sell the company as a profitable going concern than accept what's left after liquidating it? A reasonable valuation for a genuinely healthy company would be greater than book value.

I'm also confused about the practice of backs selling repossessed buy-to-let homes during a crash, evicting tenants in the process. Why sell low, rather than continue to collect the rent?

Profits fluctuate.

If a company generates -1 to 10 billion per year and has 2 billion cash on hand and assets worth 5 billion, they can handle several bad years and will tend to be profitable and very stable. If someone then says they can probably make debt payments of 5 billion a year then they might be able to do that for a while, but it will eventually cause them to fail.

The important consideration is you have already made back your investment at this point so the owners don't care. In fact if the company fails that suggests you succeeded in extracting more money than it was worth.

I thoroughly agree with your 1st & 3rd paragraphs, but the situation described in your 2nd paragraph sounds like one in which the lenders are irresponsible, whereas the owners of the borrower alone seem to usually be blamed.

The second paragraph was exaggerated for effect. However, companies are not limited to bank loans, so it may be the bond market taking on these risks. Further, there is an information asymmetry with loans so a company may be cyclical in nature yet look really good over the last five+ years.

> While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening?

While debt servicing you have less liquidity. That liquidity might be required to react to changes in the market / stay competitive. So the long term health of the company is likely going to be impacted some.

EDIT: embarrassing typo

So this investment group managed to find value in a company which previous managers had not, that's fine. But they also captured all the rewards, which none of the actual workers could do. 2.3 billion divided by 1200 is about 2 million per worker, yet they make $10 per hour. While this is legal, it seems wrong. There are plenty of frameworks (stock options, employee ownership, unions etc) that would have accomplished this but it seems like only in the tech industry is it assumed that the people doing the work deserve some of the rewards. As events like this are more common it should be just as common for non-knowledge workers to be able to benefit from turn around a like this.

> only in the tech industry is it assumed that the people doing the work deserve some of the rewards

That's only because the supply/demand situation of tech laborers gives us bargaining power at the moment. It won't last forever.

> That's only because the supply/demand situation of tech laborers gives us bargaining power at the moment. It won't last forever.

Tech is unique in the job market in that it's much easier to move up the value chain relative to other types of jobs. There is very much a tech underclass of easily-replaced workers. As time goes on, more and more of these sectors become commodified. IT workers used to be really highly paid, now they're replaceable. PHP was once in high demand, now it's only a little better than being a IT worker.

The question here is whether there will always be a sector for tech workers to move to where they can easily leverage themselves a seat at the table. I find it hard to believe that it'll suddenly go away anytime soon.

Even non techies get large stock option grants, while an outlier the chef at Google made millions when they IPO'ed. At other places I've worked writers, designers, HR, tech support etc have all gotten options. Is this not typical?

Tech companies don't give options to employees because they "deserve some of the rewards". They do it because it's difficult to attract and retain top talent, especially for speculative start-ups. That's not the case for blue-collar jobs.

A theory: The ability to capture the rewards depends to a large extent on political power within the organization (i.e. rather than merit and market value). Management has great political power, naturally; that's why in some organizations even failing managers get massive bonuses, golden parachutes, etc.. For workers to have power they need to organize themselves, and that is what unions are: Political power for workers.

People complain that unions are corrupt, which of course some are and to different degrees. That's also true of managers and anyone else with political power.

Yep. That's exactly why the idea of unions being necessary goes all the way back to the beginning of capitalist economic thinking. The first person to make a version of that observation was Adam Smith himself.

I used to have a boss who grew up and lived most of his life in Russia. Many times he would say to me: "that's capitalism, baby." I think it's a quote from a movie, he often spoke in movie quotes.

As an alternative, perhaps Hostess could have paid their employees with $10/hour worth of equity and no cash. Would that have made you happier?

I suspect the workers would not have liked it. They preferred cash to illiquid equity in a questionable company, and received it.

That's not a realistic choice, so it's not a compelling argument. The workers in this case don't "prefer" cash, it is the only option.

However, if there was a basic income in this country, I think workers in a situation could indeed make that choice. If it was $10 basic wage + $10 equity OR + $10 wage now there's something to discuss because that's a more interesting trade off.

(((edit to clarify based on comments: yes I meant a $10 basic income + either ( $10 equity or $10 wage )

I didn't even comment on the parts of the story that actually made me unhappy, which was the ridiculous debt financing deal, the blatant union crushing, skipping out on pension commitments, and ultimately laying off 90% of the original work force in order to "extract value" from a mediocre junk food company which is just going to end up in bankruptcy again when they're done with it.

How is $10 basic wage + $10 equity vs + $10 wage a tradeoff? You seem to be missing the point.

10+(10|10) not (10+10)|10

If we're talking about a basic income for just working aged Americans (because kids don't need it and the elderly are already covered by other programs) we're talking about roughly 200M people.

200M * 2000/hours per year * $10 hour = 4 trillion dollars a year.

For comparisons sake the current federal budget is about 3.8T.

I picked the $10 value for UBI at random (well, because that was the wage in the article). I should have probably thought about it a bit more. As you point out, it's a bit expensive. Maybe we could pay for it by mining diamond asteroids, who knows?

A more reasonable assumption might be $5 UBI + $10 wages = the proposed $15/hr affordable living wage.

And yeah, you'd pretty much have to tax the rich and the corporations more and stop spending so much on the military to get there. But money was invented by people, I feel like generally more of it should be in the hands of the average citizen. Sure, I want a Scrooge McDuck money vault as much as anyone, but I will argue that wealth inequalities around the globe cause real harm, and a bit more wage/equity/reward flexibility in the way corporations pay non-tech workers might be an improvement.

I'm confused why you are bringing up a basic income. I might also bring up a basic job guarantee, open borders or other random political proposals, but that's just derailing the conversation.

I agree that Hostess probably didn't offer equity. However, if it did, do you think more than a tiny number of workers would have chosen equity over cash?

Workers don't get upside if the stock does well for the same reason they don't get downside when the stock tanks. They are more risk averse and have a stronger desire for liquidity; as a result they are paid cash which satisfies their preferences.

Out of all the things that make you unhappy, which things do you think wouldn't have happened if private equity allowed Hostess to die? From what I can tell, 100% of the workers would have been laid off, the pension still would have gone bankrupt and the union would no longer exist.

The same could be said about Walmart and the Waltons who do very little to help their employees or give back to society in any meaningful way.

>it seems like only in the tech industry is it assumed that the people doing the work deserve some of the rewards.

https://www.nceo.org/articles/employee-ownership-100

That's the largest employee owned companies in America. There's a disproportionate number of grocery stores.

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