Spare a Thought for the Vulture Capitalists

By Kevin D. Williamson

Wednesday, October 24, 2018

Newspapers were for many years both socially important businesses and wildly profitable ones, and, in keeping with that, they often occupied prime commercial real estate in world capitals and small towns alike. When the fortunes of the newspaper business took a turn for the worse at the turn of the century, many publishers discovered that their real estate was worth a good deal more than the newspaper occupying it. For example, in 2013 the New York Times Company sold the Boston Globe for $70 million — with the paper’s headquarters valued at $63.8 million, or 91 percent of the sale price. When the Tribune Company emerged from bankruptcy some years ago, it sold its daily newspapers but kept the 7 million square feet of real estate associated with them, and hired a private-equity executive with a background in real estate to make the most of those assets.

The same story has played out in other industries. An entrepreneur of my acquaintance had long been invested in college bookstores, a pretty good business until Amazon and the advent of electronic books made it more or less obsolete. The value of his core business may have declined, but what did not decline was the value of all that nice commercial real estate adjacent to college campuses. IBM eventually discovered that making computers was not its most profitable line of business. Sometimes, it isn’t a declining core business but an exploding sideline that ends up changing the shape of a firm: PayPal, for example, began as a money-transfer service that was a minor part of Confinity, a security software company. General Motors’s financial arm eventually grew so profitable that critics of the company dismissed it as a bank that happened to sell cars. (GMAC eventually took a turn for the worse, as did General Motors itself.) Most of the gas stations you see bearing the names of famous oil companies have little or no business relationship with those companies, having been spun off years ago.

Because the companies that operate newspapers and oil refineries often lack the capacity or expertise to run commercial real-estate firms or chains of convenience stores, there is a whole industry of investors and financial professionals — from private-equity firms such as Mitt Romney’s old colleagues at Bain Capital to, increasingly, hedge funds — whose business it is to make the most of assets belonging to failing or failed companies or that simply are ill served by their current business organization. Our progressive friends like to denounce these investors and financiers as “vulture capitalists,” which is unfair — to the vulture, to begin with: Vultures do nature’s dirty work, and that work needs doing. Vultures aren’t pretty, but they play as important a role in their ecosystems as do butterflies and songbirds. The same is true of the so-called vulture capitalists.

Of course there are shenanigans and abuses, and very few people go into hedge-fund work understanding it as a form of public service. There were shenanigans and abuses at the general stores members of my grandparents’ generation once were obliged by the cold hard facts of geography and horse-based transportation (at best) to shop at. Dishonesty in business isn’t the result of innovation in financial engineering — it’s Old Adam, who never changes, even if he changes into pinstripes.

It is, though, strange to my ear to hear morally incensed complaints about the owners of property disposing of that property in the way that seems best to them, with our class-war progressive friends lamenting about distressed companies’ being “loaded up with debt,” as though the creditors in corporate reorganizations were naïve Ma and Pa Kettles pulling wads of cash out of their mattresses and not Goldman Sachs or Cerberus Capital.

(When a firm names itself after the Hound of Hell, one assumes it can look to its own interests.)

Which brings us to the case of Sears, the dead-man-walking retail chain that has been in the process of slowly failing since the 1980s, and which has announced that it will shutter 142 stores (not all of them are Sears-branded department stores; Sears Holdings includes Sears, Kmart, and other brands) and seek bankruptcy protection while it reorganizes. That “reorganization” almost certainly will not involve Sears rising once again to become a ubiquitous coast-to-coast retail presence and anchor of the nation’s shopping malls, many of which are every bit as moribund as Sears. Rather, that reorganization will probably be more like a fire sale of many of the company’s remaining assets. CEO Eddie Lampert, whose hedge fund controls Sears Holdings, has said that his goal is a return to profitability, rather than the wholesale liquidation of the brand and its assets. He is both the firm’s largest shareholder and its largest creditor, and of course as such better positioned to understand the firm’s operations than casual outside critics — but, still, it is difficult to imagine what a profitable Sears would look like in 2018 or afterward, and it bears noting that Lampert himself has taken enormous personal financial losses in trying to turn the company around. Once listed by Forbes among the 400 richest Americans, the poor fellow is down to his last billion. He orchestrated the Sears-Kmart merger with an eye to making the most of both companies’ assets — Kmart’s stores, which mostly were not tied to dying shopping malls, and Sears’s reputation and customer loyalty — but it didn’t quite take, or at least it hasn’t yet. Not every investment is a winner.

Sears has been in decline for a generation. In the late 1980s, Walmart surpassed it as the nation’s largest retailer; ten years later, it was removed as a component of the Dow Jones Industrial Average. It has not turned an annual profit in nearly a decade. Its liabilities outweigh its assets. It is part of a troubled sector that is likely to continue to take a beating from online retailers and other competition. None of that looks good.

On top of that, it has been missing payments to vendors. And therein lies a funny little irony. Missing payments to vendors is how Sears became the company it is today.

Sears, Roebuck and Company did not grow to become a retail powerhouse under the leadership of anybody named Sears or Roebuck. Its great genius was Julius Rosenwald, who came to own a part of Richard Sears’s failing company after the Panic of 1893, which nearly undid the company. Rosenwald was a clothing manufacturer who sold to Sears, and Sears could not pay him. Alvah Roebuck had already stepped aside from the business, entrusting his interest to Richard Sears, who arranged for it to be sold to a Chicago businessman named Aaron Nusbaum. It was a smaller world back then: Nusbaum was Rosenwald’s brother-in-law, and he suggested to Richard Sears that Rosenwald be brought in, taking equity in the company rather than the cash he was owed. Thus was born a great partnership: Neither Rosenwald nor Sears got along with Nusbaum, whom they bought out a few years later. Richard Sears remained president in name, but Rosenwald ran the company, and twelve years into his run, sales were 70 times what they had been. Soon, Sears had the nation’s first major retail IPO (handled by a friend from Rosenwald’s youth, Henry Goldman, a banker of some repute) and Rosenwald became an extraordinarily wealthy man, one who dedicated much of the rest of his life to philanthropy.

On its way up, Sears wiped out a lot of small-town general stores, which are objects of nostalgia to people who had to shop there and deal with their monopolistic owners. It was a boon for country people, and when those people moved into the suburbs, Sears followed them, building its innovative stores — big parking lots, air conditioning, no windows, an architectural strategy later copied by casinos — and eventually came to be identified closely with shopping malls. And the malls really tell the story: There once were about 5,000 malls in the United States, and they were social centers as well as retail aggregations. Today, there are fewer than 1,000, with hundreds expected to close in the coming years. In the 1980s, developers were building 60 to 100 malls a year. Now, dead malls are albatrosses around the necks of suburban commercial districts.

Societies change, and what people want and need from businesses changes, too. There was no metaphysical necessity of having general stores or local mom-and-pop shops when Sears displaced them, and there is no metaphysical necessity of having Sears, which had long since been rendered mostly redundant by Walmart and other innovative retailers, which themselves are now being surpassed by Amazon and other new innovative companies. Nostalgia does to the mind what alcohol does to the liver and smoking does to the lungs. Sure, it feels good, but there are consequences.

I wish the very best to Sears and to Eddie Lampert, but I would not bet my own money on them. (Lampert is hoping that the much more sophisticated gentlemen at Cyrus Capital or another firm see things differently, as indeed they may.) But I would wager a goodly sum on this: If Sears does finally fail comprehensively, the creditors and investors who figure out what to do with its assets, Lampert prominent among them, will be denounced and ridiculed as vultures by people who have never bothered to think about what it is that vultures do and what service it is that they perform. Lampert does not need our sympathy — business is business — but understanding what’s really happened and what’s really happening is something we owe to ourselves.