Macy's for Sale.
The word around the New York-Wall Street scene is that Edward Finkelstein is upset by this book. Personally, I don't see why.
Edward Finkelstein has been, as Barmash characterizes him, "the brightest boy in the class" on the New York retailing scene. He took the stagnant, non-performing, dying institution known as Macy's, and turned it into a success. For this work he received $ 800,000 a year.
However, what perhaps shocked the proprietary group of Macy's was that the best and brightest boy in the class, the one who received all A's, suddenly announced he was buying the "school." He did this with the aid of 346 insiders from this management group (not all shared equally). More about that later.
Barmash notes that Macy's had been run by the Straus family--the family patriarch, Jack Straus, who was there in 1902 when they laid the cornerstone for the Herald Square store! In his 64 year os association with Macy's, the firm never lived up to its billing. In fact, in the 50's, 60's, and 70's, Barmash correctly reports that Macy's earnings were sub-par.
Jack Straus installed himself as the representative of the Macy's image and its conservative tradition. He resented any Macy executive sharing the spotlight--particularly in community activities. He made one key executive drop the jet setting way that tended to land him in numerous publicity columns and he forced another executive to resign because of his community activities. He wasn't the kindly, fatherly executive, as he liked to portray himself. In any case, Macy's and particularly the New York division, were poorly run and managed until Ed Finkelstein appeared on the scene. Barmash hints that the resistance of the Straus's to Finkelstein's buyout was perhaps more of a sociological barrier--that is, the natural resistance of the "old money" to the "new money."
Barmash meshes a little history as a background to all this. He notes the store should have been called Macy's and Straus but the family settled with using its name in Brooklyn--that is, Abraham & Straus. (Civil War buffs will be pleased to learn that the Straus' brothers were zealots on the side of the South, helping raise funds by selling bonds on behalf of the Confederacy. On the other hand, the A&S branch tried to enlist on the Union side.)
Many interesting executives passed through Macy's over the years. Barmash cites Beardsley Ruml, Macy's former treasurer, who founded the "Pay As You Go" tax deduction, an acceptable form of pre-paying taxes today but considered revolutionary during World War II. Merchants passing through were Walter Hoving, the principal owner of Tiffany's a few years back and James Schoff and Jed Davidson, who moved to Bloomingdale's and became successful as president and chairman respectively by recognizing the upper-middle class, wealthy Manhattanites, as well as the well-heeled tourists.
Barmash reviews the parade of top executives that ran New York Macy's and Bamberger's. He rightfully gives credit to David Yunich for turning the business in New Jersey around and making it Macy's most profitable division. In fact, while standing at the Willowbrook Mall (N.J.) one day, I witnessed the Macy workmen taking down the "Bams" sign and replacing it with Macy's. I confess to wondering maybe they should do the reverse. After all, Macy's (N.Y.) never had such profits. Yunich was then given the unenviable task of trying to make money in New York.
Herbert Seegal was his replacement at Bamberger's. Seegal brought Finkelstein with him. Finkelstein, by this time (1962), was an able executive. Eventually Finkelstein and Seegal had a falling out, but only after Seegal reached the top rung.
After Newark, finkelstein moved to California and tackled, with success, Macy's, San Francisco. Ruturning to New York five years later, he took on a task that Seegal and Yunich all failed at. Yet Finkelstein at the beginning succeeded. By 1985, he clearly made Macy's a profitable and well positioned retailer. Barmash outlines the steps he took creating the "Cellar"; and recognizing the potential of junior and career clothing, as well as the potential of the 34th Street store.
By 1985, everything started going badly. At the same time, Macy's management became concerned about a takeover attempt, if earnings continued to decline. They were also aware that for as little as 10 percent down, a firm's management could buy out its own firm on the installment plan. In my view, the workings of the Macy's leverage buyout, the threats, the psychological factors and numbers, makes Barmash's section of this book required reading in all finance classes. In 15 pages, the author puts together a dramatic play, involving such major actors as General Electric and Prudential. The author figures Prudential earned a 28 percent return on their investment! This section is must reading for those wanting to understand the vicissitudes and vagaries of a leveraged buyout. Barmash is at this best here.
The author arises some interesting issues. Why did Macy's go through a leveraged buyout? Many answers. To create an environment to hold onto top management personnel. The jury is out on this happening since there have been many defections from Macy's. However, Barmash produces evidence that it may have worked. And to his credit, he quotes both pro and anti Macy outsiders.
Who benefited? Certainly finkelstein. After the buyout, his salary was raised by $450,000, with a long-term contract. He also took 25 percent of the one million new shares (outside stockholders received preferred shares), and his top six executives took another 25 percent. This leaves 50 percent as the balance to split among approximately 340 inside management shareholders.
Along with this came a great dealof ego-building power. Finkelstein alone represented the management investors. He named the majority of the board. The firms helping to finance the byout also benefited greatly. They received enormous pay--the author details $165 million in fees.
How did the supplier fare? Probably not too well. Suppliers often feel that after a leveraged buyout, the buyers tend to make unreasonable demands, pay their bills slowly, and are much more of a credit risk.
How did the stockholders come out of all of this? Fairly well. They did get more for their shares--about $20. however, they were deprived of the opportunity of sharing in the growth of Macy's. Barmash raises this issue. To my mind, the stockholders were paid off in cash. Bashmash's view that they should have had an opportunity to participate files in the face of what constitutes a leveraged buyout. Who are the losers? We don't know yet. The returns are not in. Macy's earnings have a long way to go.
The firm has made many mistakes--the over-emphasis on private brand has been toned down; the stores in Louisiana and Texas are under siege; the movement into specialty stores has been very late; the failed move to buy Federated stock most Macy's millions; and the competitive pressures from the apparel specialty chains is containing. Thus for the 346 other executives of the firm only time will tell if they made the right decision. As for Frinkelstein, all the ulcers aren't in yet.
Roger A. Dickinson Professor of Business Administration University of Texas at Arlington Arlington, Texas
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|Publication:||Journal of Retailing|
|Article Type:||Book Review|
|Date:||Sep 22, 1989|
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