paper illo

Pulp Friction

A private equity firm’s decision to shut down a profitable paper mill devastates a Wisconsin community.

BY Roger Bybee

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'This is a case of a corporation taking a productive, profitable plant and closing it, and refusing to sell it to anyone else.'

The Mechanics of Private Equity Firms

Private equity firms like Cerberus Capital Management--owner of the recently closed Kimberly, Wis., paper mill--have gained enormous attention in recent years because of their growing role in the U.S. economy. These firms have gobbled up well-known companies, such as Neiman Marcus, Metro-Goldwyn-Mayer, Toys "R" Us, Chrysler, Linens 'N Things and Whole Foods, among others.

Many of these firms claim to streamline the operations of under-performing firms. But Nomi Prins, author of Jacked and Other People's Money and a former managing director at Goldman Sachs and Bear Stearns, says private equity firms care only about "flipping companies and spawning whatever they can at a privately taxed bracket."

They have found many allies in Congress, including Sen. Charles Schumer (D-N.Y.), a member of the Senate Banking Committee. In 2007, the New York Times described the private equity and hedge-fund industry as "an important part of [Schumer's] constituency in New York."

Schumer raised $2 million in campaign cash for the Democratic Senatorial Campaign Committee from the industries in the first half of 2007. The senator, a self-styled foe of "plutocrats," blocked efforts--led by members of his own party--to more than double the taxes on the enormous profits reaped by industry executives. But under the weight of the ongoing economic crisis, even Schumer may feel pressure to allow some degree of regulation of them.

Schumer defended his opposition to the tax increase, telling the Times in June 2007, "If enacted federally, it would also lead to an increase in New York State tax that would further bear down on the industry." He said he worried that the industry was being unfairly singled out.

But Prins tells In These Times that private equity firms' "first concern is to cut costs, and that means cutting workers, and closing plants." She says these buy-outs "almost never benefit workers."

"Private equity funds have no real responsibility to the company they are buying," she says. "They have no responsibility to anything within the company. ... Their interest is to get in and out as quickly as possible."

Equity firms use debt as collateral to manage the purchase of corporations. Private equity funds are similar to better-known hedge funds, with the key distinction that private equity goes after brick-and-mortar companies, while hedge funds trade paper assets, such as stocks, commodities and derivatives.

Many critics say profits from private equity funds are based chiefly on special tax breaks and a strategy known as "asset stripping" -- laying off employees, raiding existing pension funds, eliminating future pension and health benefits, and selling off portions of a business -- all of which can reap returns of 30 percent to 40 percent.

With the absence of regulation, private equity firms have five major advantages:

  • Leveraging debt for profit: The more debt used to buy a company, the greater the opportunity for a big return on investment. This is because the initial cash put into the purchase by the private equity fund is so small. Typically, private equity funds use the value of the company they are purchasing as collateral, which means their cash outlay is relatively minor.
  • Tax exemption on debt: On top of that, private equity firms can claim favorable tax treatment on the debt they carry, Prins notes.
  • Big tax break on sale of properties: Profits from the operations of a private equity firm--or selling a company after it has been stripped of its assets--are taxed at the capital-gains rate of 15 percent, instead of the official corporate rate of 35 percent. That also places the firms at a far lower rate than many working families. Randall Dodd, in a July 2007 report for the Economic Policy Institute, estimated that this amounts to at least $6.3 billion in annual losses in federal tax revenue.
  • Exploiting conflicts of interest: By offering managers of a buyout a chance to reap a lucrative payoff from the sale via inflated prices for certain stock, private equity funds are often able to persuade top executives to sell their companies at bargain rates--to the disadvantage of stockholders, pension funds and workers. These side deals are shielded from the public view by the absence of Securities and Exchange Commission (SEC) disclosure requirements. They can take a public company out of public documentation--and SEC control--and spin it off into a private company.
  • No disclosure: Unlike publicly traded companies, private equity firms face almost no requirements for disclosure about their holdings, executive salaries, bonuses, potential conflicts of interest, and similar data demanded of other corporations.

    Impact on others

    Cerberus appears to exemplify the asset-stripping strategy. In 2006, the firm purchased GMAC--once the finance arm of General Motors (GM)--and laid off about 5,000 GMAC workers in the past two years--before GM's recent sales plunge.

    Cerberus is studded with Republican luminaries who have championed financial deregulation. Its key partners include former Bush Treasury Secretary John Snow and former Vice President Dan Quayle.

    Snow is former CEO of the CSX railroad line and chair of the Business Roundtable, which, in the '90s, fought for passage of the North American Free Trade Agreement.

    Another Cerberus superstar includes CEO Stephen Feinberg, whose 2007 compensation was a staggering $330 million.

    In 2007, Cerberus purchased about 80 percent of Chrysler, the iconic American auto firm that had merged with German firm Daimler. Cerberus is now negotiating with GM on a merger between the two floundering former powerhouses, and both Cerberus and GM are seeking federal assistance in the name of saving vital parts of the U.S. auto industry.

    Some academics predict that the large fees and salaries that private equity firms and their executives collect may soon decrease in the face of growing criticism and mounting financial pressures.

    Professor Josh Lerner of the Harvard Business School anticipates that trouble among private equity firms would probably "precipitate hard questions about the compensation and fee structure" in the industry. "I would not be surprised if they try to head off the criticism by returning capital," Lerner told the Times on Nov. 3.

    But regardless of possible concessions to fend off regulation, private equity remains a mechanism for extracting maximum profit from workers and enterprises.

    Stephen Lerner, director of the Service Employee's International Union's project on private equity industry, says, "The buyout business remains, at its core, a vehicle for the spectacular accumulation of wealth by the few, without regard for the impact on others."

    --Roger Bybee

  • The village of Kimberly, on the northern edge of Lake Winnebago in the Wisconsin Fox Valley, epitomizes the small, almost idyllic Midwestern town.

    Kimberly is a hybrid of the nostalgic past and the fast-paced present – from its old-fashioned soda fountain at a local pharmacy to its standard modern shopping mall. It has two elementary schools, a middle school and a high school. Every three years, the community’s Sunset Point Park hosts an international softball championship series. Fierce loyalty to the Packers in nearby Green Bay is visible, with the football team’s flags and banners fluttering throughout the community.

    The heart of this 6,000-person community is a single employer: a paper mill originally founded by the Kimberly-Clark Corporation in 1889, and bought in December 2007 by Ohio-based NewPage, a subsidiary of New York-based private equity firm Cerberus Capital Management.

    The mill has driven Kimberly’s economy and – with the help of United Steelworkers Local 2-9 – has sustained its middle-class lifestyle. It has also provided Kimberly its sense of civic identity. Even the town’s high school team mascots are called the Papermakers.

    But the mill and the community have collided with Cerberus’ obsession with extracting maximum profits from paper sales rather than continuing the production of paper. On Sept. 8, the Kimberly plant – which had been regarded as one of Wisconsin’s most advanced and productive paper mills – shut its doors. Cerberus subsidiary NewPage, which oversaw operations at the plant, cited an excess of coated paper on the market. As a result, 600 people lost their jobs, each one having worked at the mill for at least 28 years.

    Supply and command

    The aim of traditional capitalism was to generate profits over the long term from the production of goods and services. But the increasingly globalized U.S. economy has shifted executives’ focus onto short-term profits without regard to the long-term future of productive facilities or their workers. While workers have seen jobs outsourced overseas to low-wage labor, the sight of a technologically advanced plant being shut down appears senseless.

    “This wasn’t like the usual scenario we’ve seen again and again,” says Andy Nirschl, president of United Steelworkers Local 2-9, “where corporations move jobs to Mexico or China to increase their profits by paying less than a dollar an hour. This is a case of a corporation taking a productive, profitable plant and closing it, and refusing to sell it to anyone else.”

    In 2007, the Kimberly plant earned a $66 million profit under its former owner, paper and pulp manufacturer Stora Enso, according to the company’s meetings with the union, Nirschl says.

    Cerberus bought an 80 percent share of Stora Enso’s paper plants for $2.5 billion in December 2007. But of the 12 plants NewPage owned at the start of 2008, at least four were targeted for closing almost immediately after purchase. The Kimberly closing was announced in late July. NewPage still operates four other Wisconsin operations.

    By forcing the Kimberly plant’s closure, Cerberus is reducing the supply of coated paper, thereby controlling supply and demand, and maximizing profits, says a labor economist familiar with the case. In other words, by reducing the coated-paper supply, the company can drive up the price that its eight U.S. plants can charge.

    “The strategy is flawed,” says the economist. “This space [the reduction in supply from Kimberly] will be taken up by imports. We’ve seen a long history of U.S. corporations giving ground to make short-term money, and it’s always been profoundly flawed.”

    NewPage cites rising costs and a downturn in demand to justify the shutdown.

    “Since January, the demand for our products is off significantly due to the poor economy, down roughly 12 percent in the first half of [2008],” says company spokeswoman Shawn Hall. “We are experiencing unprecedented inflationary pressure that we cannot overcome through short-term productivity gains – rapidly rising, volatile inflationary costs for energy, raw material and transportation.”

    But as the labor economist notes, NewPage admits the growing competition from Chinese-based paper firms and yet the closing surrenders more market share to imports.

    Private equity firms are particularly concerned with quick returns because they typically purchase under-valued companies with small amounts of capital. Using debt as collateral – rather than investing capital directly into purchased firms – can “turbo-charge the returns for private equity funds,” the economist explains. At the same time, however, “private equity firms also take on a high risk if prices drop or the economy turns downward and they still have to pay off the debt,” he says. “It’s a high-risk, high-return approach.”

    One big family

    The Kimberly closing was a devastating blow to workers, whose years of experience were key to the plant’s success.

    “It was like family,” says Sue Anderson, who put in 31 years at the mill. “So many people had been there for so long together. It hurts. They [NewPage] threw it in our face like it didn’t matter to them. All your hard work all those years meant nothing.”

    The Anderson family’s ties to the plant spanned 75 years. Sue’s father retired after 44 years at the mill.

    Steelworkers’ Nirschl says NewPage and Cerberus are determined to keep the plant closed, even spurning offers by other corporations to buy the facility and keep it operating.

    “Our village administrator has heard from three companies that are interested in buying the plant, and the union has been contacted by another potential buyer,” he says. “But even if a new owner wouldn’t make a competitive product, [NewPage officials] say it’s not for sale.”

    Spokeswoman Hall says the company has “not heard from” these prospective buyers.

    On Sept. 24, several Wisconsin legislators – Democratic Sens. Herb Kohl and Russ Feingold, and Reps. Tom Petri (R) and Steve Kagan (D) – met with NewPage President Mark Suwyn to persuade him to keep the Kimberly plant running or to sell it to someone who would. Suwyn told the lawmakers that the company is willing to lease the plant to a non-competing firm.

    But Nirschl challenges that claim: “If they’re going to lease the plant, who is out publicizing that?” he asks. “They won’t be able to lease it unless they’re letting companies know it’s available and are actively marketing it.”

    Asked if the company has a marketing plan for the plant, NewPage’s Hall responded, “No.”

    Not without a fight

    The mill closing has left Kimberly fighting for its life. Hundreds of yard signs that read “Run It or Sell It” dot the local landscape, a challenge to NewPage. The signs seem a bit incongruous in a solidly middle-class town of tree-lined streets and well-kept homes.

    “People take a great deal of pride in their property and vehicles, and have the money from the mill to maintain them,” says Village Administrator Rick Hermus, whose grandfather, father and three brothers worked at the Kimberly mill, with his brothers among the victims of the closing.

    “Run It or Sell It” messages have even appeared on electronic billboards run by the local credit union and other businesses.

    The community seems to recognize that its affluence has been built on the union’s strength and that its future depends on the workers’ ability to pressure NewPage.

    On Sept. 6 – two days before the plant closed its doors – the Steelworkers sponsored a rally that drew an estimated 5,000 people in support.

    “To paraphrase Dylan Thomas: We cannot lock up and go quietly into that good night,” union Vice President Jon Geenen said at the rally. “We cannot watch industry after industry leave with no industry to replace them.”

    On Nov. 15, the union founded “Camp Kimberly,” an area across the street from the quiet NewPage paper mill. There, former mill workers are holding daily vigils to demand executives re-open the mill or sell it to a new owner.

    Steelworkers have also held vigils and more demonstrations locally and at the State Capitol, meeting with elected officials and forging alliances with NewPage customers and the local business community.

    The union also sent more than 100 workers by bus to NewPage’s headquarters in Miamisburg, Ohio, a Dayton suburb. The union got pro forma responses from company officials who met with them, and the Steelworkers were pleased by the media attention generated in NewPage’s backyard.

    The union is also trying set up a meeting between Wisconsin lawmakers and John Snow, the CEO of Cerberus Capital Management (and former treasury secretary under President Bush).

    Facing the future

    The plant’s closing is having a negative impact on Kimberly and the surrounding area. The village’s volunteer fire department – which depended heavily on mill workers – will likely be disbanded and replaced with a much more expensive arrangement for fire protection. The mill used to grant its volunteer firefighters time off the job to fight local fires. And with discarded workers leaving the area to find work elsewhere, the village will need to fill the void.

    Tom Vandevyver, who followed his father into the paper mill and put in 31 years before the recent closing, says the economic consequences are taking their toll on the community.

    “Business at the supper club is down 20 percent to 30 percent,” he says. “Myself, I haven’t been out to eat in months. Right now, I’m looking at selling my new truck and my boat.”

    Vandevyver, a 49-year-old with gray flecks in his black hair and beard, sees little cushion coming from the severance package offered by the company – 26 weeks of pay and six months of health and dental coverage – or in the Trade Adjustment Assistance (TAA) set up by lawmakers Kagen, Kohl and Feingold.

    But the TAA promised benefits remain stuck in the pipeline due to cutbacks in the state’s staffing of programs for dislocated workers. “There is only one TAA administrator for us,” Nirschl explains. “The people – myself included – have put in calls to see what we are eligible for and to get answers, and you do not get any answer. [The TAA administrator] is so backed up that we still have not received all the paperwork and cannot get answers to what we qualify for or how we go about doing it.”

    Meanwhile, Kimberly workers also note that the programs don’t address the shrinking supply of fair-wage jobs.

    “Any wage you see offered out there is between $10 and $15 an hour,” says Vandevyver. (The average annual income of the workers at NewPage was about $56,000; the job required overtime and work was regularly scheduled for weekends and holidays in order to keep the presses running.) “I’ll probably wind up taking a second job, too.”

    He sees continuing the fight against NewPage and Cerberus as his best shot at maintaining a life with some security.

    “We’ve got to fight to keep manufacturing in this country,” Vandevyver says. “We’re going from a middle-class country to just the rich and the poor.”


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    Roger Bybee is a Milwaukee-based freelance writer and University of Illinois visiting professor in Labor Education. Roger's work has appeared in numerous national publications, including Z magazine, Dollars & Sense, The Progressive, Progressive Populist, Huffington Post, The American Prospect, Yes! and Foreign Policy in Focus. More of his work can be found at zcommunications.org/zspace/rogerdbybee.

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