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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 16, 2012 at 10:30 AM

What killed Hostess?

It makes a convenient fairy tale, especially in the “conservative” blogosphere, to claim that unions were behind the demise of Hostess Brands, which has announced it will wind down its operations, closing 33 bakeries and 565 distribution centers, laying off almost all of its 18,500 workers. Among the closures is the streamlined moderne building in South Lake Union familiar to generations of Seattleites.

The Washington Post’s reliable right-wing propagandist Jennifer Rubin put it this way:

Is there any wonder (pardon the pun) that Big Labor is at a low point in membership and public support? The notion that it’s better to send 18,500 people to the unemployment lines and dissolve — not merely sell, but break up and eviscerate — a venerated company is the sort of zero-sum mentality that should send American workers fleeing from organized labor.

The reality, naturally, is far more complicated. It is true that the company has faced a strike by the Bakery, Confectionery, Tobacco Workers and Grain Millers Union, which affected nearly two-thirds of Hostess’s factories across the country. Workers rejected the company’s offer by voice vote. The Teamsters, by contrast, voted by secret ballot with members approving the deal. Teamster drivers did honor the picket line while quietly prodding the other union to reconsider.

But years of management missteps go along with those of the unions. Hostess has been in two Chapter 11 bankruptcy reorganization filings in recent years. The company founded as Interstate Bakeries in Kansas City, Mo., in 1930, went through a series of mergers and name changes after 1975, when it was acquired by a computer-leasing company. Management took it private, then public, then private again. “Rip, strip and flip” deals went bad. There was the obligatory move of the headquarters to an office “park” in Irving, Texas. A botched 1995 acquisition of Continental Baking caused a ruinous culture clash.

When Hostess emerged from its first Chapter 11 in 2009, unions made huge concessions and the company was controlled by private-equity outfit Ripplewood Holdings and other investors, including two hedge funds specializing in distressed companies. To further complicate a comic-strip narrative, Ripplewood is run by Tim Collins, a Democrat who wanted to explore deals with union-represented companies.

In the latest Chapter 11, the company was saddled with nearly $1 billion in debt. In addition, it was reported that while operating under Chapter 11, top executives gave themselves 80-percent raises in 2011. To be fair, a new chief executive came in last spring and cut the salaries of the four top execs to $1 (to be restored in January). Symbolism is better than nothing. A big complaint is “legacy” pensions, some $2 billion worth. The unanswered question is why were these unfunded during the good years? Executive compensation is never unfunded. When chief executives fail, their lavish golden parachutes are never unfunded.

Meanwhile, America changed. The appetite for Twinkies, Ding-Dongs, Cup Cakes, Suzy Qs and those mysterious but tasty fruit pies waned as healthier eating became popular. The Great Recession added its damage. With the workers on the street, investors will gain something back by selling off some of those trademark products, and, as the Puget Sound Business Journal reported, such coveted real estate as the South Lake Union bakery.

The best summation of the Hostess tragedy was written before the final act, last summer in Fortune. “In truth there are no black hats or white knights in this tale. It’s about shades of gray, where obstinacy, miscalculation, and lousy luck connived to create corporate catastrophe.”

Today’s Econ Haiku:

A big BP jail?

Corporations are people

The Court told us so

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