The vultures have begun to circle over Wilmington.
As the Philadelphia Inquirer reported (Sunday January 11), billionaire financier Nelson Peltz has decided to force big changes at DuPont, the 200 year old industrial giant. DuPont isn't dead, of course. In fact, it's doing just fine. But vulture-investor Peltz is convinced that DuPont isn't generating profits for shareholders big enough or fast enough. He has a plan to fix that.
Vultures have already circled Canton, Ohio. They had their eyes on the Timken Steel company, a venerable manufacturing operation run by the Timken family for over a century. And though the vultures have different names, they have exactly the same goal: Tear the company apart in order to extract the maximum profit for shareholders in the shortest amount of time. They thought Timken was "undervalued," and they forced the company to split into two.
Timken and DuPont have both been profitable. Indeed, Timken ought to be hailed as a national success story since it is one of the few steel makers left in this country. During the 1980s, when other steel companies were whining about union labor and overseas competitors, Timken invested in its own future -- to the tune of $450 million. It now dominates the market for the highest margin specialty steel.
No one is pretending that after the vultures swoop down these companies will be better at what they do. In fact, these vultures don't have the faintest expertise in chemicals or steel. Nor do they have the faintest interest in those things. What matters is how much can be squeezed out of the companies before they fly off in search of their next meal.
So perhaps it's time we acknowledge a fundamental contradiction of the American economy: American finance capitalism is bad for American business.
American businesses make their profits by making and selling things: they put people to work, and sometimes invest in their host communities.
Finance capitalists, the bald-headed vultures of our economy, feed off American business. They don't make anything but profits for themselves, they create few jobs, except in private equity firms and investment banking houses, and they care not a whit about places like Wilmington or Canton.
Yes, they will squawk that they bring efficiency to the economy, that they make floundering companies streamlined and competitive. And by forcing conservatively run companies like Timken to take on more and more debt (provided by. . .guess who??) they provide them with the cash to invest. In practice, of course, this has mostly meant shutting American companies down and relocating American jobs to China.
Even if honest people can disagree about the immediate effects of a visit from the vultures, it is unarguable that "activist investors" like Peltz and private equity firms like Relational Investors (the folks who have torn apart Timken) do not know the meaning of the phrase "long-term." As Bill George, former CEO of Medtronic and now a Harvard Business School professor, told theNew York Times: "Activists think long-term is 12 months."
What this sacrifices, of course, is the future of whatever industry the vultures have landed on. American business used to have robust and innovative research and development operations. Bell Labs, the legendary R&D unit of AT&T, produced no less than 8 Nobel Prize winners, but during the latter decades of the 20th century those labs suffered budget cuts and lay-offs.
The American pharmaceutical industry is another case in point. Under increasing shareholder pressure to produce profits immediately, their research and development programs have shrunk to just over 13 percent of their domestic sales, according to a recent survey. By contrast Big Pharma now spends 25 percent -- twice as much -- on advertising to get you to buy something now. So every slightly naughty ad you see for Cialis or Viagra today represents a disinvestment in medical research for tomorrow.
As Bill George described it, once the vultures take over "the first thing that goes is the stuff that pays off in five or 10 years." Exactly, and as he pointed out, historically, "America's strength isn't from low labor costs. It's from research and development and capital investment." Nelson Peltz apparently has his eye on DuPont's R&D spending as a place to cut, cut, cut.
After a visit from the vultures we can count the jobs lost and total the effects on local communities. How do we measure the loss of the future -- new patents, new products, new innovations -- that the whole nation suffers once the vultures fly away?
Steven Conn teaches history at Ohio State University. His most recent book is Americans Against the City: Anti-Urbanism in the Twentieth Century (Oxford University Press).