
America’s Oldest Gun Maker Went Bankrupt: A Financial Engineering Mystery - Deinos
https://www.nytimes.com/interactive/2019/05/01/magazine/remington-guns-jobs-huntsville.html
======
kevin_b_er
Not a mystery: Private equity firm bought them out with borrowed money, raided
their resources to enrich themselves, then left Remington to rot. It is a
common story now. The private equity firm makes a bunch of money and people
are jobless.

~~~
rtpg
I get that money is money, but I feel like we desperately need to make
conflict of interests prosecutable, so we can kill the self-serving mess that
are LBOs.

In what universe is "I borrow a bunch of money, buy a company, then force the
company to basically borrow money from me" a value-creating operation? Cuz it
sure isn't this one.

~~~
toast0
The alternative to leveraged buyouts is probably not a healthy company, it's
more likely a slowly dieing company that goes out with a whimper, not a bang.

Is one way better than the other?

~~~
FireBeyond
So you're saying these firms are just being rewarded for putting the beast out
of is misery and being the one to fire the gun?

The other way is absolutely better. The "bang" you hear is the bursting vacuum
of PE sucking all the value out of the company, depositing it in their bank
account, and leaving others holding the bag, a bag that's now far bigger
because the company now has less to no ability to satisfy its obligations.

But the PE firm made billions for (sometimes, less than a year of) "management
and consulting fees".

These kind of leveraged buyouts are perilously close to what Tony Soprano does
to Ramsey Sports and Outdoors - take a controlling interest (albeit by a
different method), utilize the business' credit lines, assets and collateral
to bring in a lot of (temporary) value, transfer it out of the company, and
leave the smoldering ashes of a company massively bankrupt with bad debts all
over town, including many it didn't have before the buyout happened.

------
paganel
> Because private-equity firms appear frequently as villains in the press,
> many people assume that they cater mostly to the superrich, earning high
> returns on investments for billionaire clients. They do. But by far the most
> important piece of their business — 48 percent, according to the data-
> analytics firm Preqin — is investing capital for American pension funds.

This doesn't get mentioned often enough when talking about the "1-percenters"
and the wealth gap in Western countries, i.e. that most of the capital behind
all of the current economic and social system is directly or indirectly held
by part of the general populace itself.

The issue is of course that the other part of the populace (generally speaking
people under 35 who cannot put money towards their retirement funds or who can
only get temp jobs) are not part of this financial arrangement and, as it so
happens, are also some of the worst affected by the current economic set-up
(those temp jobs I was mentioning are not as great as the normal full-time
jobs held by people whose pension funds are managed by the companies investing
in Cerberus).

Afaik almost no politician has focused on this social and economical
contradiction, if I may call it this way, some of them are putting whole of
the blame on the 1-percenters, some of them are choosing to ignore it all
together, but almost no-one has actually looked at the real numbers. And the
real numbers tell the story of a society divided in two, a part that will
manage to enjoy its pension and the other part that has no clue how will pay
for its old age.

~~~
aksss
Having been gainfully employed in corporate IT since I was 19 - and doing max
contribution to my 401k every year since - I'm not "in touch" with the
predicament of today's kids. Are they alright? Record employment numbers
today. Wage growth up. We still have a talent shortage. Being (now) a business
owner, my biggest complaint on the talent front isn't a lack of education in
candidates, it's a lack of customer focus and inner curiosity (to be
aggressively learning in one's spare time and on the job).

~~~
Shivetya
many want the trappings of success out of the gate and keep ignoring many of
their bosses and superiors at work have a lot of time invested and earnings
already. they also confuse what they seen TV for real life.

tell, who doesn't have people in the lower rungs of their IT group with more
expensive cars or outfits than you would feel comfortable with at twice their
salary? then top off the people who eat out every day who are usually part of
the "only contribute to the 401k to the match" crowd.

yes there are people struggling but many who are gainfully employed struggle
too because they have no discipline and worse some don't want help.

the education system needs to concentrate more of teaching children to take
time in acquiring things and first get a safe financial base to work from.
politicians needs to stop pandering to people's jealously and blaming it all
on the rich, here's a clue the real one percent outside the odd billionaire
are the politicians who write the rules and sell favors through their law
making work (tax code, occupational regulations, and property zoning)

~~~
irrational
I tell this to my college age kids. One of them is off touring Europe right
now. I asked her how she is paying for it (and pointed out that I've never
been to Europe because I can't afford it). She says she is going into debt to
do it, but it is okay because experiences are more important than money. She
is studying anthropology and non-profit management. I've pointed out that
there aren't very well paying jobs with those kind of degrees. She dismisses
this and says she isn't in it for the money. How many other Gen-Z kids are
also in it for the experiences and not the money? Judging by her and her
friend group, she's not the only one. I tried teaching her financial prudence,
but social media exerts more of an influence on her thinking than all my
example and talk every could.

~~~
mschuster91
Your daughter is more financially prudent than you think: she realized that,
no matter how much of her young life she lived on ramen, she will never have
much in her name as most of her income will be wasted away on rents,
transportation and food. So she decides to f..k it and at least have fun.
Better die poor and having lived a fruitful life than die poor and having
lived on ramen the entire time.

With many of my generation spending upwards of 50%, sometimes even 70% or
more, only on housing, how on earth are we expected to build savings? With six
figure student loans that aren't dischargeable in bankruptcy and medical bills
at similar conditions? We will be the explosion that finally shows how fucked
up pension systems and wealth allocation have become, and this bubble will
explode in about 40-50 years, if not earlier.

Add climate change to the mix which our politicians won't do anything for the
coming 10, 20 years and which will inevitably and unpreventably explode at the
same time... yes, definitely, I rather have a life now, I won't be able to
make it to retirement anyway, no matter what I do.

~~~
UnFleshedOne
Meh, there is a difference between not having much to your name and having a
fat debt collector sitting on your neck.

"sure, there is no way you can walk over that pile of broken glass without
cutting your feet, so fuck it, lets get naked and roll around in it, at least
you'll feel the breeze gently waving your nether parts for the first half of
the process"

~~~
mschuster91
She's one medical emergency or expensive treatment (cancer) away from
bankruptcy anyway, which can wipe out her savings in an instant. No matter
what, there will always be debt collectors looming over her head.

~~~
ericd
Insurance is a thing... you do have to build up enough savings to survive
while not working, but that’s doable if you don’t blow everything on traveling
and other luxuries.

~~~
mschuster91
I doubt this. Even as a German I regularly get healthcare gofundme's in my
twitter feed. HN frontpage regularly has horror stories about billing,
including "out of network" hospitals in emergencies.

There is no way one can build up savings to shoulder such shit, much less are
savings to be used for medical issues!

~~~
ericd
As an American currently working with healthcare data, I’m familiar with the
abundant failings of the US healthcare system. But I think it’s a mistake to
think that it’s completely unavoidable and take a fatalistic attitude and feel
like you always have a sword hanging over your head. As far as I can tell,
it’s avoidable, but you need to get decent insurance before you’re sick, and
to save up money to help you ride out times when you’re not making money (as
well as pay the deductible/out of pocket portion). This is definitely
expensive, and if you make no money, it can be difficult (though you'd then
likely qualify for Medicaid). But many Americans do make quite a lot, and
spend everything they make (and more) during the good times, even if they pull
in >$100k/yr. Consumerism has a much stronger hold here than it does in
Europe.

EDIT: A bit more, since I didn't really address your comment about out of
network charges.

In the event that you get balance billed for some surprise out of network
charge despite going to an in-network facility, you likely don't have to pay
it, even though they're invoicing you. Contacting your insurer about it will
likely take care of it. And if it turns out that you do need to pay it,
hospitals are generally willing to accept $0.10-0.20 on the dollar for self-
payers who can't pay, before they send it to collections. You don't have to
pay the retail price, which is totally made up and has very little relation to
what they'd accept. This is largely due to their adversarial relationship with
the insurance companies, which force them to accept the lesser of their retail
price and their contracted rate. Think of the high prices as the starting
point in their negotiations.

I fully agree that the US healthcare system is very messed up, and that what
I'm saying sounds insane and unnecessary. I wish we had a single-payer system
in the US (with optional private insurance on the side). Fortunately, it seems
like people are getting sick of this, and we're getting closer to getting
that. I just wouldn't take the attitude that the world is totally fucked, so
you should live for today.

~~~
mschuster91
> Fortunately, it seems like people are getting sick of this, and we're
> getting closer to getting that. I just wouldn't take the attitude that the
> world is totally fucked, so you should live for today.

That depends if the US gets another four years of Trump, or a repeat of the
final Obama years with a sane President blocked by a Republican-dominated
congress.

I would not be so certain that the outcome of the 2020 election is a Democrat
president, a Democrat controlled House and a Democrat controlled Senate - and
even if all three end up in Democrat hands (which I hope for!) those in power
should rather not be bought off by the insurance industry.

To make it worse, even if all stars align and all of this happens, there still
remains the problem of exploding rents preventing anyone who rents (=99% of
the young population) to make meaningful savings or retirement contributions,
and to top that one off student loans also are in dire need of reform and hell
will freeze over before the US will even consider the German model of tax-
funded world class universities.

------
Blackthorn
There's a certain amount of poetic justice here for Remington, seeing as how
they acquired Marlin and then fired all their expertise, completely ruining
the brand. Good riddance.

~~~
sparrish
Agreed. This isn't a unique tale for a firearms manufacturer. This is a common
tale for nearly any type of manufacturer that is bought out by private equity
firms. They reduce costs and quality, load it with debt, suck it dry, and then
dump it on their creditors.

~~~
bluejekyll
I’ve read about this scenario many times, but I’m curious about why any
creditor would lend money to a company that’s poised to do this.

Wouldn’t these private equity firms lose the ability to borrow money based on
past practices like this?

~~~
icelancer
Bain Capital and others who do LBOs don't have a 100% failure rate. It's just
that the failures are reported and the successes (Lenovo) are not celebrated.

~~~
coredog64
I would add TPG and OnSemi to the success column. It was painful working there
when TPG was keeping things lean for a sale, but they did eventually invest in
the business an OnSemi was much better for it.

------
sn0n
I especially liked this bit "The pension fund for the Boston-area public water
utility invests in Cerberus. The California State Teachers’ Retirement System,
CalSTRS, is a Cerberus client, as is a pension fund for the Presbyterian
Church as well as many university endowments, sovereign wealth funds and
philanthropic foundations." Made me chuckle a bit inside, as I know a couple
people who are less on the side of guns, as they are more on the side of
teaching, who would be dying inside knowing their retirement money is used
like this.

~~~
MrMorden
American universities have rushed to move as much lecturing as possible to
adjuncts, and cap as many employees as possible at 29 hours/week to avoid the
ACA. Just like with a fire-and-brimstone televangelist, it's only immoral if
other people do it.

~~~
username223
> American universities have rushed to move as much lecturing as possible to
> adjuncts... it's only immoral if other people do it.

No, it's just plain immoral, not to mention short-sighted. American primary
and secondary schools are also squeezing their teachers, by hiring Filipinos
on J-1 visas, just like tech companies do with H-1Bs.

It's a bit like like making room in your fridge by pushing everything back,
then adding new stuff. It works for awhile, but eventually leaves you with a
mess of spoiled milk and rotten vegetables in the back. You can only strip-
mine a hill for so long before it's gone.

------
_bxg1
"Financial engineers" aren't interested in building a sustainable business;
they want to play a game cleverly, make a cash-grab, jump ship, and leave
thousands dealing with the fallout. It's a similar short-term strategy to that
taken by many SV founders who build a company only to sell it, though
obviously the latter don't cause nearly the same degree of harm to society.
But they still pass on opportunities to create actual value and jobs, in favor
of making a quick buck and moving on to the next exploit. It's the mindset of
locusts.

~~~
iscrewyou
I love the term financial engineers. In my head, it defines the person, the
procedure, and the purpose.

~~~
_bxg1
The problem with engineers (speaking as one myself) is that we're prone to
focusing only on the mechanism itself, abstracting away the details and
ignoring the parts of the system we can ignore. In software we can often get
away with this because the rest of the system is just further machinery; there
are benefits to taking it into consideration, sure, but nobody gets hurt when
you don't.

But business and finance are not software. Their systems are made of people.
When you waste a CPU's time by ignoring its nuances, you simply get less out
of it. When you shuffle money around, writing off the nuances of industry and
economics as blips in a monetary machine, you destroy lives. I understand the
appeal of the engineering mindset, but you have to be a psychopath to continue
in it while leaving such destruction in your wake.

~~~
iscrewyou
I know and I agree. And a software engineer is much different than a
mechanical engineer or a civil engineer. I guess I should’ve mentioned that
the term financial engineer gives me context or a reference point where I can
see that they are behaving like engineers. My comment was more focused on
their behavioral mechanisms.

~~~
_bxg1
I figured that was possibly what you meant; I was just elaborating.

------
kyrieeschaton
Remington's product quality went way south soon after the acquisition and
hasn't really recovered. When you have a very traditional market for your
products (many firearms designs are decades old), those products are
expensive, and potentially designed to save your life or at minimum contain
tens of thousands of PSI inches from your face, losing your reputation for
quality is a death sentence, and due to the capital costs, you're unlikely to
be able to squeeze out cash by burning your reputation.

------
axaxs
> A plunge in NIC checks foreshadows a corresponding plunge in gun sales

I'm curious about this statement. NIC checks are, as the name implies,
instant. They happen upon transfer of ownership of a firearm from an FFL
dealer. So I'm not sure how they 'foreshadow' sales, more likely they mirror
sales. In fact, when you purchase a gun online, the sale occurs before the
check...

~~~
madengr
Also, with the number of CCH licenses, those don’t needs a NICS check.

~~~
lostapathy
That of course is state dependent - not all states carry permits get you out
of the NICS check.

~~~
dfrage
And in the other direction, fewer states are requiring a permit, so no doubt
some people are not bothering to renew their permits.

------
vorpalhex
This is not an uncommon story for firearm manufacturers unfortunately. Tooling
costs are high, sales hard to predict, and designs can fail easily. Ian
McCollum of Forgotten Weapons has done a lot of videos on this topic.

~~~
Simulacra
There's also the issue - perhaps - of market saturation. How many guns does
one need? My pro-gun friends typically seem to have 2-3 but shy away from any
more than that.

~~~
jcranmer
There is an intriguing trend in the United States where, for the past several
decades, the number of gun owners has gone down but the number of guns has
gone up.

~~~
brightball
Do you mean the percentage of owners?

I can count on one hand the number of people I know who own a home but don't
own a firearm.

~~~
jcranmer
I did mean the percentage, but it does look like the absolute number of
households owning guns has very slightly declined.

~~~
Junk_Collector
I imagine it's difficult to get good numbers on ownership though as the cross
section of people who would not disclose firearm ownership to the government
or polling agency would also be likely to own a firearm. This is compounded by
the fact that firearms last upwards of 100 years with minimal maintenance and
there are healthy secondary and black markets for them.

~~~
hcurtiss
Nope. No guns at this here house. Not since the tragic boating accident of
early 2019.

------
elchief
The theory behind this is, a stable company should have plenty of debt, as it
can easily pay it off (because it's stable), and is generally cheaper than
equity.

A company should also have only as much cash as it needs, else management will
waste it

So a private equity company sees a company like Remington, with too much cash
and not enough debt. It borrows a lot, buys it, and minimizes cash reserves.
This tends to increase the market cap substantially

However, this obviously has some downsides, if you don't get the default risks
just right...

------
KorematsuFred
This is sad to know. Back in India we owned a Remington rifle which was like
80 years old and still worked really well. No Indian made rifle could match
its reliability.

------
matthewaveryusa
The part I don't get is how Cerberus made money. It seems like it was a zero-
sum for Cerberus. They loaned the holding company 225M, and presumably got
that money back through the holding buying the stock back from Cerberus after
the holding sold the 11% corp. bonds.

Is it that between when the holding bought the stock back from Cerberus and
Cerberus (via the holding) sold the bonds Cerberus had control of Remington
(via the holding stock) and therefore effectively sold Remington's assets,
paying themselves through the holding's stock. Then, when Remington was
valueless, the holding bought the stocks back from Cerberus as if Remington
still had value leaving the bond holders hanging?

That's such a dumb scam. Why would anyone buy those bonds, and how was
Remington able to get a loan to buy the holding's stock if Cerberus raided it?

~~~
CalChris
Cerberus buys Remington for $118M in cash and assumes $252M in Remington debt.
Except that it wasn't Cerberus, it was a Cerberus subsidiary S which Cerberus
owned with stock X. Then Remington borrowed $225M which it transferred to S
which then bought back its stock X from Cerberus.

Cerberus is then out of the transaction with $225M - $118M. Remington + S
(which Cerberus no longer owns) has $252M + $225M in debt.

~~~
sigstoat
> Then Remington borrowed $225M which it transferred to S which then bought
> back its stock X from Cerberus.

hmm. so, who is willing to loan Remington $225M in that situation? it seems
like "recently bought by private equity company known for shenigans" would
discourage banks and prospective bond purchasers?

~~~
CalChris
_the holding company offered a generous interest rate of around 11 percent.
When the interest payments were due, the holding company paid them not in cash
but with paid-in-kind notes, that is, with more debt._

Who could refuse such a deal?

~~~
sigstoat
> In 2010, Cerberus had the holding company borrow $225 million from an
> undisclosed group of lenders, most likely hedge funds. [...]

ah, thank you for pointing that out.

but then:

> In April 2012, Cerberus did something fateful, which probably seemed smart
> at the time. It had Remington borrow hundreds of millions of dollars and use
> it to buy the holding company’s debt

hm so the first set of lenders were paid off. did the second set get similar
terms?

------
johan_larson
How are these strip-shops able to resell the heavily debt-burdened companies
they create? That's the part I don't get.

~~~
airstrike
They sell it to another sponsor who thinks they can do more with it.

But by and large most private equity shops are not in the business of asset
stripping. Those deals just don't make the news and the average reader is
oblivious to them

------
madengr
Remington just doesn’t have that many interesting guns. There are a ton of
firearms manufacturers in the last 20 years. I’m guessing the AR-15 market
alone is billions in revenue.

~~~
omegaham
I'd argue that you don't need interesting guns if your basic offerings are
really high-quality. There's room for "plain oatmeal" in pretty much any
market.

The problem is that even their basic offerings have drastically declined in
quality. If you make plain oatmeal, you'd better be really, really good at it,
or else you have absolutely nothing going for you.

~~~
ARandomerDude
Exactly. This is Glock. Plain as it gets but they just work (TM).

------
lph
These private equity scams seem to revolve around borrowing money,
transferring the debt to a separate legal entity that then declares
bankruptcy, and pocketing the money. If that’s true, then it would seem that
creditors (and AL taxpayers in this case) end up holding the bag. How are
savvy lenders falling for this?

------
legitster
Yet another leveraged buy-out. Are there any business cases where one of these
panned out well?

~~~
mrfredward
Leveraged buy-outs started off well enough. The original idea was something
more like this: Old-timer spent years building a business, now it's worth
about 2 million bucks and he wants to cash out. His young, motivated #2 in
command wants to take over, and after years of saving has $200k. Old timer
goes to the bank, takes out a $1.8 million dollar loan against all the
business's assets, with the debt being the businesse's obligation. Older timer
has the business pay him a one-time, $1.8 million dividend, and then sells the
business to #2 for $200k. If business stays steady, the company's profits pay
off the loan and everyone lives happily ever after.

As a way for old-timers to retire and pass on control of small private
companies, LBOs are really useful. The problems started in the 80s when
private equity firms realized they could sell enough junk bonds to do LBOs on
giant publicly-traded companies.

------
dba7dba
At this point, I feel most employees of a business that's up for sale should
just put their foot down and say no to selling the company to any private
equity firm.

The owner can say, hey I worked for this and I need to exit with a plan.

Well, the employees can say we worked for this and we need to make sure we
will have our jobs in 5 - 10 years.

I am working in a company that used to be privately owned, and was sold to a
PE. It happened before I joined. The ones who are still here tell me the night
and day difference in how the employees are treated before and after the sale.
The treatment I'm talking about is how the employees are compensated.

------
boshomi
the finitude of being

Companies are man made so the have a limited live span. There is no exception,
every man made organisation will end. While this is sad for every single case,
the finitnes is a good thing at all.

Thinking on finitnes of companies, stock market indexes have a mathematical
limit.

~~~
brainfeed0
They are living things. But also, greedy bastards can take living, thriving
businesses into the embassy in Istanbul, chop them up and sell the pieces for
profit.

------
needaccount
Anyone know a convenient summary showing Cerberus total cash flows and net
earnings for the full time?

------
airstrike
inb4 private equity is evil and we should kill all financiers

Please don't throw the baby out with the bathwater

------
taksintikk
Thoughts and prayers

------
bayareanative
Vulture cannibal capitalists don't care who or what they destroy, as long as
they make $.

~~~
brainfeed0
Yup. Wonder if there's any co-op / worker-owned medium-sized firearms
manufacturers that are US-based?

------
nn3
Sounds good to me. Essentially it ended up being an ethical investment. I hope
Cerberus can use its "methods" on more gun makers.

