William E. Simon’s super profitable purchase of Gibson Greeting Cards ignites the 1980’s leveraged buyout boom
Plus, the sad story of the looting of Simmons Mattress Company
Summary: In early 1982, William Simon’s leveraged buyout company, Wesray, invested $1 million of their own money, along with $79 million of borrowed money, and bought Gibson Greeting Cards. Simons contributed $330,000 of his own money. Sixteen months later Wesray sold the company. Simon’s $330,000 investment returned $70 million. Wall Street went crazy.
A 3rd company Wesray bought was Simmons Mattress Company. After Wesray sold the company, an additional series of LBO’s looted Simmons. Simmons had been profitable since 1870. The looting of good companies continues, and the next Substack will discuss the history of these issues.
The LBO’s of Gibson Greeting Cards, Anchor Glass and Simmons Mattress Company
William E, Simon served as the 63rd United States Secretary of the Treasury. He became the Secretary of the Treasury on May 9, 1974, and served until 1977. Simon considered himself a strong advocate of laissez-faire capitalism. He wrote, "There is only one social system that reflects the sovereignty of the individual: the free-market, or capitalist, system".
Simon became a pioneer of the leveraged buyout (LBO) in the 1980s. Simon and a partner, Ray Chambers, a tax accountant, founded Wesray Capital Corporation (Simon contributing the "Wes" and Chambers contributing the "ray"). Wesray Capital, bought and sold a number of companies including, the Gibson Greeting Card Company, Anchor Glass, and the Simmons Mattress Company.
A leveraged buyout involves investing small amount of your own capital along with significant borrowed money, to complete the purchase of a company from its shareholders. Debt financing is essential to LBO’s. The company is then “re-structured” and resold, after making changes that "often included job cutbacks and other short-term cost-reduction measures".
1--In January 1982, Wesray invested approximately $1 million in equity capital (with Simon contributing $330,000) and borrowed another $79 million to take private a Cincinnati-based greeting card company, Gibson Greetings, for $80 million. Eighteen months later, the company was taken public again, with a value of $290 million. Simon's $330,000 investment returned $70 million. As noted, Wall Street went crazy.
The success of the Gibson Greetings investment attracted the attention of the media to the nascent boom in leveraged buyouts, included a junk bond trader named Michael Milken. Milken dominated the financing of LBO’s until he was arrested, and his network collapsed. The next Substack discuss these issues.
2--The purchase of Anchor Glass allowed Wesray (Simon) to made millions more through insider deals with the company. These deals involved the company leasing its land, buildings, and equipment from Wesray. Wesray also received banking fees for handling the subsequent purchase by Anchor of Midland Glass Company. Anchor Glass also bought casualty, liability, employee health and benefit insurance from a brokerage firm partially owned by Wesray. The Anchor Glass corporate headquarters in Tampa was leased from Simon. Anchor Glass later admitted in an SEC filing, that "these arrangements ... were not the result of arm's length bargaining ... [and] were not ... favorable to the company". Anchor Glass was finally bought by a Mexican company, Vitro, S.A.
Willaim Simon had adopted other LBO techniques to increase profits--sale lease backs controlled by insiders and requiring captured companies to do business with other insider captured companies. These techniques are now used by Private Equity.
3--Simmons Mattress Company, a company founded in 1886, was bought by Wesray and partners bought in 1986 for $120 million and sold it in 1989 for $241 million.
By the late 1980s, Forbes magazine was estimating Simon's wealth at $300 million.
What happened to Simmons Mattress Company after these buyouts? Simmons had been profitable since 1870.
Simmons suffered financially under the successive ownership of multiple private equity firms and other private investors. The private equity owners extracted $750 million in profits out of Simmons, while the company's debt increased from $164 million in 1991 to $1.3 billion in 2009. On September 25, 2009, Simmons announced a Chapter 11 restructuring plan.
Simmons underwent the first in a series of corporate mergers and acquisitions in 1979, when the company was acquired by Gulf and Western Industries. Six years later, Gulf and Western sold Simmons to Wickes Companies. Wesray Capital (William E. Simon) bought the business in 1986, and sold it to the Simmons employee stock ownership plan in 1989. Merrill Lynch Capital Partners obtained a majority interest in Simmons in 1991, and sold to Investcorp in about 1996. Fenway Partners bought the company about two years later, then sold to Thomas H. Lee Partners in 2003. As noted, in 2009 the company filed for Chapter 11 Bankruptcy. So long as there was value to be extracted, company continued to be bought and sold. On January 23, 2023, Serta Simmons Bedding again filed for Chapter 11 bankruptcy.
From the New York Times October 2009:
“For most of the 133 years since its founding in a small city in Wisconsin, the Simmons Bedding Company enjoyed an illustrious history…. Presidents have slumbered on its mattresses aboard Air Force One. Dignitaries have slept on them in the Lincoln Bedroom. Its advertisements have featured Henry Ford and H. G. Wells. Eleanor Roosevelt extolled the virtues of the Simmons Beautyrest mattress, and the brand was immortalized on Broadway in Cole Porter’s song “Anything Goes.
“Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.”
“For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.”
“But Thomas H. Lee Partners of Boston (THL) has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.”
“Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.”
“A result: THL was guaranteed a profit regardless of how Simmons performed. It did not matter that the company was left owing far more than it was worth, just as many people profited from the mortgage business while many homeowners found themselves underwater.”