Chewy cookies are the best. Archway, the master for years, made great oatmeal cookies. But last October the company declared bankruptcy. And over the weekend, The New York Times exposed the accounting shenanigans that preceded its collapse. The article is unsettling at a visceral level.
We enjoy Archway cookies at Acrimoney.
The article also illustrates the difficulty of making money in private equity (PE). Catterton Partners is one of the best PE firms in the business. They have a distinguished track record. Their investments, past and present, include household names like Odwalla, Caribou Coffee, and Restoration Hardware.
For all its investment glories, though, Catterton was at the helm of this collapse. Archway ditched amid weak sales and—if you will forgive us—cooked books. These troubles lead us to ask a philosophical question:
Do companies lose their souls when owned by financial intermediaries?
Let’s break down the NYT story. We’ll make a few observations about PE as an asset class. And we’ll describe at least one difference between Catterton and Archway’s new owner, Lance.
NYT: Wachovia “provided tens of millions of dollars in loans and lines of credit backed by assets to Archway despite the fact the company had not had a formal independent audit of its financial statements in three years.”
Acrimoney: Hmmm.
NYT: “Archway’s failure also raises questions about how some private-equity shops operate. When they acquire broken companies, the firms pledge to use their financial, strategic and operational expertise to fix them.”
Acrimoney: “Financial expertise” is a euphemism. All too often, it translates as “borrowing more money.” Under Catterton’s ownership, Archway depended on bank lines from Wachovia.
At Acrimoney, we believe it’s tough to combine business and financial risk. Take on one. But not the other. Archway was struggling when Catterton acquired it from Parmalat in 2005. The company required an operational turnaround. The presence of debt added risk and exacerbated pressure on management to sell cookies. And as it turns out—to cook the books.
NYT: “Catterton renamed the business the Archway & Mother’s Cookie Company and put a senior adviser and three of its partners on Archway’s board. It also installed Keith Lively, a managing partner at Insight, as Archway’s chief executive.”
Acrimoney: You’ve heard the expression, “It’s just business.” This colloquialism means, “It’s not personal.”
That’s ridiculous.
Business is personal. Hired guns are okay. Management companies and outside board members offer unbiased advice. That’s a good thing. They don’t always bring animal allegiance. That’s a bad thing. There’s no substitute for emotional commitment, especially when times turn tough and you need a reason other than money to stay in the game.
Archway started in 1936. Back then Harold and Ruth Swanson, a husband and wife team, baked cookies and doughnuts inside their garage in Battle Creek, Michigan. They made tough, caring decisions—like dropping the doughnut line during World War II when ingredients were in short supply. Archway was the Swanson’s baby.
NYT: “After Catterton took over, Archway began ratcheting back spending on in-store promotions, which distributors contended made their cookies less competitive in stores. Catterton also abruptly shut a bakery and distribution plant in Oakland, Calif., which had made Mother’s Cookies for several decades. Operations were shifted elsewhere.
The Catterton spokeswoman said that while there were layoffs in some Archway facilities, there were additions at others. Moreover, she said, Catterton was aware that the management of Archway continued in-store promotions ‘where it made business sense to do so.’ In other cases, management stopped or reduced promotions because they were ‘ineffective and/or unprofitable.’
Besides putting 230 of the Oakland plant’s employees out of work, the closure had another negative effect. It lengthened the time between when the cookies were baked and when they hit store shelves around the country.”
Acrimoney: We wonder what Harold and Ruth Swanson would say about stale cookies.
NYT: “ ‘What soured me on this experience is that these private equity firms that come in and buy companies don’t look at a company to grow it. Whether it sinks or swims doesn’t really matter to them,’ Mr. Pfeifer said. ‘They don’t think about the people whose livelihoods depend on that company. I hope I never have to go through that again.’ ”
Acrimoney: Let’s contrast this experience to a different owner. Last October Lance bought factory assets out of bankruptcy. Lance makes snacks. It’s not a financial buyer. Lance rehired 60 workers and gave each a $1,500 Visa card for Christmas.
We suspect Archway’s cookies never tasted better.
There are three takeaways here. 1) Even the best PE managers stumble. 2) Big risks accompany big investment returns, no matter how good the historic results. 3) Great companies require emotional commitment, the kind Steve Jobs brings to Apple.
We’re just glad Archway cookies are still in production.
The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.