Sorry for the light posting so far today, but I’ve been sidetracked by dozens of emails about my argument that Permira should tell portfolio company Hugo Boss to keep open its Ohio suit-making plant.
Specifically, I said that Permira might be making a poor financial decision for itself, in that the resulting loss of future LP commitments could exceed — or at least offset — savings generated by outsourcing the Ohio jobs to [insert your own Asian nation here].
In response, the collective you has accused me of “hypocrisy,” “populist buffonery” and of being a “raving protectionist.” Some of these attacks are accompanied by compelling dissents, so let me try to address them:
My original post viewed the Hugo Boss situation as a math problem, in the context of Permira’s current and future balance sheet (which is different than ROI from its funds). Some readers claimed that this is exactly the sort of thing I would normally blast a PE firm for considering (e.g., my earlier screeds against inquitable fee-sharing agreements).
They are correct. The prospects of a future Permira fund — and the attending management fees — are largely irrelevant to whether or not Hugo Boss should shut the Ohio plant. Instead, our primary concern should be whether or not closing the Ohio plant is in the best interest of Permira limited partners (all of them, not just OPERS).
Hugo Boss originally asked the Ohio workers to accept what would have worked out to an aggregate pay cut of around $1.87 million per year (I originally reported $2.5m based on 400 employees, but Hugo Boss has since told me it’s actually 300 employees).
As part of shutting the plant, Hugo Boss expects to spend around $1.5 million on severance and outplacement benefits. Moreover, Hugo Boss also won’t take advantage of various financial incentives that Ohio officials offered in exchange for keeping the plant open. Finally, Hugo Boss will pay an undetermined amount to train new workers, change supply chain logistics and open a new facility (some of these costs could be reduced via using an existing vendor, but not eliminated).
As such, Hugo Boss itself is likely to lose near-term money on the Ohio facility shutdown. Going forward, it can be expected to save $1.87 million per year (this is not exact — overseas labor costs may be lower than the Ohio offer, while shipping finished suits back to the U.S. could cause cost increases). For context, Hugo Boss reported €1.68 billion ($2.28b) in 2008 revenue and €354 million ($480m) in personnel expenses.
In other words, the savings represent less than one-half of one percent of what Hugo Boss spends on its employees, and less than one-tenth of one percent of total revenue. And, remember, both the overall company and this particular factory are profitable.
But, as critics remind me, $1.87 million is still $1.87 million. Isn’t Permira’s fiduciary responsibility to look out for the best interest of its investors and, as such, save every dime it can from within its portfolio? Wouldn’t the costs multiple if Permira told all of its portfolio companies to keep “less competitive” facilities open?
I agree that Permira’s primary responsibility is to its investors. Its secondary responsibility, however, is to its portfolio companies and to its portfolio company employees (all employees, not just senior executives). If the two cannot be reconciled, then the LP interest should win out. But if the LP savings are very small when compared to the costs being borne by portfolio company employees, then I think an honest debate can — and should — be had.
As is certainly clear by now, I take the Ohio employees’ side in that debate. This isn’t about U.S. vs. Asia or any sort of similar nonsense. It’s simply about a group of employees who have added to Hugo Boss’ profits, and who are being discarded so that the company can boost its bottom line by an amount so small that it wouldn’t even show up in quarterly financials. I do understand the other side, but respectfully disagree.
Finally, there have been some suggestions that Permira keeping the Ohio plant open would be to value the OPERS relationship more than that of other LPs.
First, private equity firms almost always value certain LP relationships more than others. Ever seen an LP advisory board stacked with small family offices? Or how some VC firms spend a certain number of days per month in states like Utah, in order to satisfy one-off LP agreements with state pension funds?
Second, and more important, this argument assumes that most other LPs would prefer the plant to close. Perhaps it’s a reasonable assumption, but it’s not one in evidence. After all, lots of LPs have signed onto various social responsibility pacts that trade potential ROI for greater goods. If it is true that most Permira LPs prefer Hugo Boss to save $1.87m annually in exchange for the jobs of 300 current employees, then Permira should follow their wishes (even if it were not my wish). But the answer should not be considered a given…