An interview with Nicholas Shaxson, author of The Finance Curse
By Julie Reynolds
Nicholas Shaxson has spent a career looking into highly secretive companies. He is, after all, the author of a respected book on offshore tax havens (Treasure Islands, 2011) and another on private equity (The Finance Curse, 2019).
But even he was a bit stunned at Alden Global Capital’s lack of transparency compared to other firms he’s investigated.
“This is about the most opaque one I’ve ever seen,” he told DFMworkers.org.
Shaxson is an author and investigative journalist. He was born in Malawi and educated in the UK, but he’s in many ways a citizen of the world, having lived in a dozen or so countries. And he is prolific — this month, he has an article in The Nation about the effects of global finance on American agriculture.
He recently agreed to speak with DFMworkers.org from his residence in Berlin.
His latest book, The Finance Curse: How Global Finance is Making Us All Poorer, features a chapter about Alden, owner of one of America’s largest (and growing) newspaper chains. (Full disclosure: I was quoted in it).
A big part of the book’s premise is that we’ve been told that international big finance is all about “wealth creation,” when in fact it’s really a conveyance for wealth extraction.
Shaxson sees Alden as a “mixture between a hedge fund and private equity, because it does kind of hedge-fundy things like messing around in the debt markets and arbitrage and stuff like that.” But Alden also uses that access to cash “to buy and control companies that are doing real things in the real economy,” he said.
“Alden was particularly interesting because it’s in the media sector,” Shaxson said. “I’m a journalist by background, and it goes so clearly to the heart of democracy. And what they’re doing is tinkering with one of the very foundations of democracy.”
‘What they’re doing is tinkering with one of the very foundations of democracy.’
When he spoke with me about the methods of wealth extraction employed by private equity, Shaxson stressed that he’s not specifically talking about Alden. Yet I couldn’t help but notice that many of the typical approaches he describes do seem to fit much of Alden’s playbook.
Shaxson noted that Alden “very much epitomizes the kind of wealth extraction, as opposed to wealth creation, that is right at the heart of The Finance Curse thesis.”
Companies like Alden, he said, will “buy something — a company that hasn’t run its financial affairs through tax havens enough, for example — and they’ll go and engineer that and suck money away from taxpayers. They’ll go and say that maybe the workers are being paid too much or the unions are too strong or the pension fund is too generous, and then they’ll go after those and squeeze some more out.”
He described three ways that private equity and hedge funds extract wealth from the companies they control or acquire.
This one’s the simplest. Financial firms like Alden charge “management fees” for the investments they make with other people’s money.
“So what you’re doing, you the mogul, the titan running the show, you buy up a company,” Shaxson said. “But you don’t buy it with your own money, you buy it with someone else’s money… While that company is still afloat, you are each year creaming all sorts of fees off that operation.”
Alden, for example, reports that it has just over a billion dollars in “assets under management,” which means it’s collecting around $20 million a year in the standard 2 percent management fees, even if the investments it makes take a dive in the stock market.
“That’s kind of unearned easy money,” Shaxson said. “You say this is for running your offices and telephones or whatever. But at the end of the day, it’s a huge amount of money.”
The “op-co, prop-co shuffle”
Another way to extract cash is to sell off land and buildings, something for which Alden and its real estate subsidiary Twenty Lake Holdings are well known.
It’s what Shaxson calls “the op-co, prop-co shuffle.”
Essentially, a private equity investor will acquire a business that has both operations — say, publishing a newspaper or selling shoes — and real estate holdings like stores, offices and printing plants. The investor will split the company into a property company and an operating company, Shaxson said.
Then the property company and the operating company “sign a contract or series of contracts that are extremely favorable to the property company.”
In some cases, he said, the operating company will even lease its own buildings back from the property company – but at exorbitant rates.
“So what you’ve got here now is you’ve got an operating company, which is much less valuable because they’re having to pay very high rates, and a property company which is much more valuable, because it’s got this long-term guarantee of large income.
“You’ve made a lot of money, because you’ve suddenly made your property company much more valuable than it was.”
What happens to the operating company, that part of the business that actually provides products or services?
“If they’re running a shoe business or a newspaper or whatever, they might say, ‘Well, we can’t afford to pay all these workers, so we’re going to cut everybody’s salaries and fire a bunch of people and make them work in horrible buildings’ and all this kind of stuff. You crunch them right down to make sure you can make all those payments. And if, at the end of the day. the operating company goes bust, well, the private equity firms’ owners have got their money anyway.”
This certainly smells like Alden’s wholesale sell-off of Digital First Media newspapers’ land, buildings and printing plants to its own very secretive spin-off, Twenty Lake Holdings, which coincidentally also handles personal real estate deals for Alden’s founder, Randall Smith.
In the cases of Fred’s Inc. and Alden-controlled Payless ShoeSource, Alden forced the companies to sell their longtime headquarters – in Memphis and Topeka, respectively – and quietly move their executives into an office building that Smith owns in Dallas – roughly 450 miles from Memphis, and 500 from Topeka.
Debts, payoffs and payouts
I’m pretty damn cynical, but I’ll admit this last one utterly floored me. Shaxson again made clear he doesn’t know if Alden has used this ploy, but I was curious, so I pressed him on how it works.
It involves, well, just taking money.
“Imagine I’m a private equity person and I buy a shoe manufacturer or whatever, and it costs 50 million dollars,” he explained. “It’s a healthy company, making plenty of money selling shoes, and the bankers will lend to it. But you then say, ‘You borrow that 50 million dollars, and pay me, the new owner, 50 million dollars.’
The new owner might have even used other peoples’ money to finance this unfortunate situation.
“And if that (now) highly indebted company goes bankrupt, you’ve already made your money,” he said. “You’ve already got your money back. So it hasn’t really cost you anything. And alongside that, you’ve been creaming fees off these other investors who came in alongside you. So you can come out with a profit.”
The important thing is that the loan is on the shoulders of the company. “If that company collapses, it’s not you, the private equity firm, that owes that money. It’s the company that’s gone bankrupt. So the creditors will have to take the hit.”
One way to convince them, Shaxson said, is to simply say, “We own you, and if you don’t do this, we’ll fire you.”
Or the investor can offer incentives to play ball. “Savvy firms don’t want to be bought up by private equity raiders, so there might be people on the board who are in opposition to this kind of strategy,” he said. “But the private equity firms will often just sign a deal and say, ‘If you let us buy you out, we’ll give you, Manager A, a share of the winnings.’”
I’ll admit that sounds like a straight-up, old-fashioned payoff to me.
“On an ideological level,” Shaxson said, the private equity firms doing this “don’t tend to make very strong justifications.” Most often, he said, investors will raise “the original ‘shareholder value’ ideology that was first really pumped by Milton Friedman.”
Alden raised this very argument when it tried to take over the Gannett newspaper chain last year, asking, “why should shareholders believe this board will not keep destroying shareholder value?”
Alden invoked the “shareholder value” refrain three years ago when acquiring the Fred’s pharmacy chain, using $158 million siphoned from its Digital First Media newspapers. “Fred’s abysmal business decision-making and country club environment in the executive suite and boardroom are serving as significant obstacles to maximizing shareholder value,” Alden said in statement at the time.
Ironically, under Alden’s watch, Fred’s stock went on to lose all its value and its stores have been shuttered.
It used this argument, too, in a failed takeover of Pier 1 Imports, telling that company’s board that it “cannot be trusted to protect the best interest of Pier 1 shareholders.”
Now Alden is singing that tune again this year while maneuvering to take over Tribune Publishing. Tribune’s board chairman David Dreier was quick to reassure the public, saying, “Our board believes that solid journalism enhances shareholder value and that will continue to be our driving principle.”
Alden, however, quickly jockeyed for two new Tribune board seats. It put Dana Goldsmith Needleman, a friend of Alden co-founder Heath Freeman, in one of them.
It shouldn’t surprise that Needleman is an expert not in journalism or turning newspapers around, but in corporate real estate sales.
Check back soon for a Q and A with Shaxson on tax havens, the surprising reach of international finance, and possible solutions.