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Nov 9, 2009 Too Much Weekly: More Merger Madness

Click here to read the Too Much weekly edition, as emailed to readers on November 9, 2009.

This Week in Too Much

You don’t have to be a high-flyer in high finance to get a kick — and a fortune — out of wheeling and dealing. Greed and grasping, we need to remind ourselves every so often, are still thriving right down on the ground, in America’s oh-so pedestrian manufacturing sector.

The latest case in point: the $4.5 billion merger deal announced last week that will fold the 99-year-old Black & Decker tool-making powerhouse — the folks who brought us the world’s first pistol-grip power drill — into its chief tool-making rival, Connecticut’s Stanley Works.

What will this merger now bring us? We have that disturbing story in this week’s Too Much. Also this week: some distinctly more cheery news — about a promising new partnership between U.S. steelworkers and Spain’s most equality-minded enterprises. An antidote to merger madness? Maybe. Read on.

Greed at a Glance

Bonuses on Wall Street this year, a leading New York compensation consulting firm reported last Thursday, will jump an average 40 percent this year. That firm, Johnson Associates, has a simple explanation for the big boost. Explains firm managing director Alan Johnson: “As firms have gotten healthier, they pay their people more.” And what will their people be spending their new-found fortunes on? Maybe a duplex in Manhattan’s Trump Tower. You can snare one with “phone-controlled air-conditioning” for just $14,995,000. Also included in that price: a refrigerator with motorized shelves, a neat touch, says the realtor listing, sure to help you “easily accommodate your groceries.”

The upcoming year-end bonus billions on Wall Street, researchers at Bain and Company reported last week, won’t be enough to prevent a 16 percent dropoff this year in North American luxury retail. So what are luxury retailers doing? They’re looking east for new markets — in Mongolia. Louis Vuitton has just opened its first luxury outlet in Ulan Bator, Mongolia’s capital. Why Mongolia, a nation with an average income that runs just $1,800? Mongolia turns out to be one of the world’s newest mining hotbeds. In Mongolia, says analyst Antoine Belge from the HSBC banking giant, “the big luxury brands are targeting pockets of wealth,” in the “small communities of people that have money.”

Stuart WheelerOut of the mouths of babes — and elderly right-wingers — sometimes come gems. In Britain, the mega rich have been fulminating for months against plans to raise the UK’s top tax rate next year from 40 to 50 percent on income over £150,000, the equivalent of about $250,000. British deep pockets — ranging from insurance tycoons to actor Michael Caine — are threatening to leave the country if the tax hike actually goes into effect. But the 74-year-old business tycoon Stuart Wheeler, one of the British Conservative Party’s biggest donors, isn’t going anywhere — and can’t understand why any rich people in their right minds would. Noted Wheeler last week to the Times of London: “I think it’s pretty mad to go and live somewhere you don’t want to be, purely for tax reasons, when you have already got a lot of money.” Added Wheeler: “It seems to me that if you are pretty rich, the number one thing you would want to do with your money is use it to live in the country you want to be in.”

Deep pockets who do depart for sunnier tax climes may have to leave some of their prized possessions behind. But you can bet they won’t leave home without their Centurion, the world’s most exclusive credit card. Worldwide, says a new analysis, somewhere over 30,000 super rich carry the Centurion, a titanium-laced card from American Express that costs $5,000 to get and $2,500 a year to maintain. To qualify for a Centurion, you have to have spent at least $250,000 a year with an American Express Platinum card. Among the goodies the super rich get for carrying a Centurion: a personal concierge and a free membership with Space Adventures, the space tourism company.

Recent years have seen chronic political turmoil in Thailand, complete with blockades, violent clashes, and even a state of emergency. What’s driving all this bitter political division? A columnist for Thailand’s biggest business daily is blaming his nation’s “massively unequal distribution of wealth and power.” Households in Thailand’s most affluent fifth, Nation analyst Chang Noi noted last week, are averaging 15 to 18 times more income than bottom-fifth households, almost double the income gap in Thailand’s Asian neighbors. Thailand’s richest 0.1 percent, meanwhile, hold 40 percent of Thai bank assets. A 1994 study, adds Noi, found that Thailand’s poorest 10 percent were paying nearly twice as much of their incomes in taxes as Thailand’s rich. No one has since then done a follow-up study. The results, says Noi, would be “too embarrassing.”

Quote of the Week

“Countries with high levels of inequality will almost invariably imprison a larger proportion of their population. And have lower literacy scores, more obesity, more teenage pregnancies, worse mental health, and shorter average life-spans than those with much lower levels of inequality.”
Andrew Bradstock, director of the Centre for Theology and Public Issues, University of Otago, New Zealand Herald, November 6, 2009

Stat of the Week

Billionaire Michael Bloomberg, re-elected last week to a third term as New York’s mayor, has now spent $249 million out of his own pocket on his three electoral triumphs, or $121 for every vote he has received. By way of comparison, last year’s Barack Obama Presidential campaign, after the most successful electoral fundraising effort ever, spent $10.50 per vote won.

In Focus

A Do-It-Yourself Giant Does It to Workers

Last week, in the moments right after corporate tool-makers Black & Decker and Stanley Works unveiled their upcoming merger, Stanley spokesperson Tim Perra could barely restrain himself. Proclaimed the smiling flack: “It’s a match made in heaven.”

Heaven for who? Not consumers. The new “Stanley Black & Decker” may soon have enough marketplace dominance, says Morningstar business analyst Anthony Dayrit, “to raise prices” on do-it-yourself gizmos that range from power tools to window locks.

And workers won’t find much heaven in the merger either. Black & Decker and Stanley together currently employ a workforce just over 40,000. The merger the two companies announced last week will eventually cost an estimated 10 percent of those workers their jobs, starting with staff at the Black & Decker headquarters just outside Baltimore.

No surprise there. In any big-time merger, at least some employees will always become “redundant.” A newly merged company, after all, doesn’t need two sets of headquarters staff.

But redundancies, after a big-time merger, never seem to show up in executive suites. Top execs at firms getting swallowed up either get cushy positions in the new firm or golden parachutes that ensure them a gentle landing when they leap out into the cold hard world.

Black & Decker CEO Nolan Archibald had to choose between the two. By contract, Archibald could have walked away from the new Stanley Black & Decker with a severance package worth $20.5 million.

Archibald has chosen instead to stay on as the new company’s “executive chairman” for the next three years. The 66-year-old won’t have to do much heavy lifting in this new slot, except to cart his ample paychecks to the bank.

How ample? For attending board meetings and “advising” — and playing no role whatsoever in the new company’s day-to-day management — Archibald will collect a $1.5 million annual salary. He’ll also pocket a $35.5 million pension and another $15.7 million from his Black & Decker supplemental retirement plan.

On top of all that, the Associated Press reported last week, Archibald may grab as much as $45 million in bonus “if cost savings goals are met in three years.”

Meeting those goals shouldn’t be too difficult. Archibald and Stanley CEO John Lundgren have plenty of experience cutting costs. They know the secret. They just slice away at jobs and wages.

Last year, for instance, Black & Decker sales dropped 7 percent. Black & Decker paid CEO Archibald $12.1 million anyway, then announced plans to cut worker salaries by up to 5 percent.

Stanley CEO Lundgren, for his part, took home only $4.6 million in 2008. Last December, Stanley took steps to pump up that disappointing take-home — by closing three manufacturing facilities and axing 2,000 jobs.  

Wall Street cheered that move. And Wall Street is also cheering Stanley’s takeover of Black & Decker. For good reason. The deal will mean a quick 22 percent profit for Black & Decker shareholders. The investment banks that shepherded the merger deal along — Goldman Sachs for Stanley, JPMorgan for Black & Decker — stand to do even better.

Investment bankers typically cream off fees that equal at least 0.1 percent of a merger deal’s total value. On multi-billion-dollar deals, these fractional percents can add up fast.

So far in 2009, not counting last week’s blockbuster Stanley-Black & Decker action, JPMorgan has pulled in $1.26 billion advising clients on 156 merger-and-acquisition deals. Goldman Sachs has grabbed $1.22 billion, over the same time span, on 142 deals.

Where do all these billions in fee revenue go? Roughly half the revenue investment banks make from merger deals traditionally goes straight into banker bonus pools.

Into the communities these mergers devastate, a top U.S. labor leader charged late last month, goes nothing.

“Too often,” says United Steelworkers president Leo Gerard, “we’ve seen Wall Street hollow out companies by draining their cash and assets and hollow out communities by shedding jobs and shuttering plants.”

Gerard’s union has just announced a merger “deal” of its own — to help put an end to that hemorrhaging of jobs and futures. The Steelworkers will be joining with the Spanish-based Mondragón International, the world’s largest network of industrial worker cooperatives, in a bid to “transform manufacturing practices in North America.”  

“We need a new business model,” Gerard explains, “that invests in workers and invests in communities.”

Mondragón may just fit that bill. The Mondragón network, launched 53 years ago by a visionary Basque priest, has become Spain’s seventh-largest business group and currently operates 260 enterprises in over 40 countries — making everything from high-tech tools to refrigerators.

Workers in Mondragón cooperatives own their enterprises. They each have an equal share and an equal vote in key enterprise policy decisions. Workers in Mondragón businesses, notes long-time progressive analyst Carl Davidson, “themselves decide on the income spread between the lowest-paid worker and the highest-paid manager.”

That spread, across the Mondragón universe, averages 4.5 times. In the United States last year, CEOs averaged 319 times the pay of average U.S. workers.

The United Steelworkers, the biggest union of manufacturing workers in the United States, will now be looking to apply Mondragón principles to “viable small businesses in appropriate sectors where the current owners are interested in cashing out.”

“We see Mondragón’s cooperative model with ‘one worker, one vote’ ownership,” says Steelworkers president Gerard, “as a means to re-empower workers and make business accountable to Main Street instead of Wall Street.”

For thousands of workers at Black & Decker, and millions of consumers, that accountability may come a little too late.

In Review

The Power of Pay Perversity

James Crotty, The Bonus-Driven ‘Rainmaker’ Financial Firm: How These Firms Enrich Top Employees, Destroy Shareholder Value, and Create Systemic Financial Instability. University of Massachusetts Political Economy Research Institute Working Paper, October 2009. 77 pp.

The power suits that sit at America’s financial summit are getting their mojo back. They’ve already shoved real regulatory reform off the table. Now they’re stalling reform-lite. This year appears almost certain to end without any meaningful change in the financial industry reward structure that encourages the rich to get fabulously richer — at everyone else’s expense.

How could this be happening? Indeed, how could the entire phenomenon we know as the modern financial sector have happened in the first place?

How could the “rainmakers” of Wall Street — a cohort of 10,000 or so bank executives, bond traders, merger advisers, and stock-offering specialists — end up personally pocketing tens of billions of dollars a year, over an extended period of time, when average shareholders in their firms, over those same years, were actually losing money?

Even more to the point, asks economist James Crotty, how could “giant firms structured so that their top employees enrich themselves” at shareholder and public expense be “allowed to function without meaningful interference by any individual, institution, market force, or regulatory authority”?

In this wide-ranging new University of Massachusetts working paper, Crotty attempts an answer — by taking us inside what he calls the “rainmaker firm,” by helping us understand how “perverse compensation incentives” unleash dynamics that bring out the worst in everyone.

Crotty’s final conclusion points us to the absolute necessity of regulatory reform that directly confronts the size — and the power — of those perverse incentives.

“Rainmakers control investment banks and other important financial institutions and run them in their own interests and against the interests of the firm and the objective interests of its shareholders,” sums up Crotty, “because nothing — other than government regulation of compensation schemes — can prevent them from doing so.”

Congress and the White House don’t yet get that. Read this paper and you will.

New Wisdom on Wealth

James Kwak, Do Smart, Hard-Working People Deserve to Make More Money? Baseline Scenarion, November 2, 2009. A former management consultant explains why he has “little patience for the idea that rich people deserve what they have because they worked for it.”

Sarah Anderson, ‘Pay czar’ doesn’t play hardball with executives, New Haven Register, November 3, 2009. Tax dollars, says this veteran critic of over-the-top CEO compensation, “should no longer be used to aid and abet excessive executive pay.”

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