A number of years ago I was hired in a management position for a distribution company that was locally owned. A few months after I started the job, a letter came from the company owner. He had decided to sell the business to a much larger company based in New Jersey. Even in the low-margin world of distribution, this larger company had what is known in mergers and acquisitions as "deep pockets," in other words they had a lot of cash on hand.
As I looked into the acquiring company, I learned that they were one of 90 companies owned by a "private equity group." A private equity group is basically one or more wealthy investors who are not satisfied with buying mutual funds or stocks - they prefer to own small and mid-sized companies. I was told that this particular private equity group was bankrolled by "oil money." I pictured a big, grinning Texan with his pockets stuffed with money from his Texas drilling.
But the real "oil money" was not from the US. It was from the Middle East. And these private investors didn't care a bit about the US employment rate or doing the right thing for the city or state in which the business was located - the customers that had supported the company for fifty years.
My company had 55 employees when the acquisition was announced. I almost survived, but got nailed in the last cut, when they reduced from 22 to 17 employees.
Fortunately, I bounced back OK and have done very well. But ever since then, I've been paying attention to who owns small and mid-sized businesses. And I have to tell you, the trend isn't very good. Any successful US business with maybe $10 million or more in sales is like a tiny minnow swimming in a sea full of sharks. The hedge funds and private equity groups will throw some money at the business owner, who suddenly realizes that retirement with a bagful of cash looks pretty appealing. The private money comes in and starts cutting costs to increase the return on investment. "Cutting costs" almost always means cutting people from the payroll.
The most disturbing things about these investors is that: (a) They have no loyalty to the city, state or country the business is in. Their only goal is to maximize ROI, (b) The majority of the money behind these groups is from outside the US, and (c) These creeps usually operate under the radar. They have to follow the same regulations as small businesses, but their investments are not subject to the same regulations are publicly traded stocks.
You put these things together and it's easy to see why our economy is in the state it's in and unemployment is stuck over 9%. These private equity groups are ruining the middle class, stealing the salaries of workers who they lay off to put in their own pockets.
Hedge funds are different in name, but no better than private equity groups except they don't invest in smaller businesses quite as much. But the people who invest in hedge funds (as well as the hedge fund managers) are 1-percenters - they want one thing and that is return on investment. And the hedge fund manager is glad to oblige, no matter what the consequences to employees are. Actually what prompted me to write this blog is that Sears/K-Mart just announced today they are closing 120 stores. Although it is a publicly traded company, Sears main owner is a hedge fund manager by the name of Eddie Lampert, who has in the past few years turned Sears into a hedge fund. He's learned that the real estate the stores are located on is worth more than the store itself - so guess what his response is? Close 'em down!
What's the solution? The government needs to pass stronger anti-layoff laws. Maybe a law to limit the number of job cuts a new business owner can make within the first three years they own the new acquisition. In any event, something is needed.
By the way, I have a new book coming in a few weeks, American Epitaph. (available on Amazon in print and Kindle January 10) It takes place in 2025 and the story finds the US in complete economic and political chaos. I fear we are headed for an American Epitaph if our government doesn't do something to stop the mass transfer of wealth from the middle class to the wealthy.
