The continuing saga at Malden Mills Industries Inc. is turning into a case study of whether altruism makes good business sense.
Six years ago, the US textile company, which has manufacturing facilities in Europe, gained fame after owner Aaron Feuerstein kept paying thousands of idled workers after a devastating fire. The payments totalled around £17.6 million, roughly the amount the company is seeking to borrow from a group of lenders - some of whom want the company to file for bankruptcy (director-e News, Monday 19 November).
Writing in the Boston Globe, Ross Kerber points out that with hindsight, some wonder whether Malden Mills should have held on to the cash instead.
"It's a big problem if it turns out they ran themselves into the ground by giving those payments", said Robert Losey, a professor at American University's Kogod School of Business.
But Feuerstein's benevolence may also have laid the groundwork for a comeback.
Citing Feuerstein's past conduct, US Senator John F. Kerry has urged Jeff Immelt, chief executive of General Electric Co., Malden Mills' largest lender, to help the company avoid bankruptcy.
"When the chips were down, Mr Feuerstein did not leave his workers behind", said Kerry, the Massachusetts Democrat, in a statement issued after a telephone call with Immelt. Given the circumstances, "it is important that we do all we can for Malden Mills and its employees", Kerry said.
A General Electric spokesman said Immelt wasn't available to discuss the company's response.
Malden Mills' problems don't stem entirely from its generosity to workers. The company's management made some questionable decisions after the fire, like rebuilding too many production units at a time when the industry was changing.
But with Kerry's intervention, coupled with support from other state and federal politicians, it seems likely Malden Mills will continue operating with Feuerstein at the helm.
If so, his generosity would also prove rational, "a smart business move", said Karl Spilhaus, head of the Northern Textile Association, a Boston-based trade group of which Malden Mills is a member. By continuing the payments, "not only did he build loyalty among the employees, but also support from the outside", Spilhaus said.
The stakes are high for Malden Mills and its 1,200 local employees, a work force that will grow by several hundred people during the company's busy season in the spring. The lending group, led by GE Capital Corp., is split over whether Malden Mills ought to be required to file for Chapter 11 bankruptcy protection as a condition of additional lending to allow the company to continue paying for materials and other costs.
Malden Mills lost money in the fiscal year ended October 30 and now has debt of £100 million. Some lenders worry that additional loans need the extra security of a Chapter 11 filing, which would give them a priority over other creditors in a liquidation proceeding.
Feuerstein is resisting a bankruptcy filing, which he said would raise the company's operating costs and perhaps drive big customers like Lands' End to seek new suppliers for polyester fleece fabrics. In an interview this week, Feuerstein said he had no regrets about his decision to continue paying the employees and that he hoped to remain in control of the 95-year-old family business.
For Malden Mills, the turning point came after three of its nine buildings were destroyed by a December 1995 blaze, ruled an accident. Feuerstein decided to rebuild the entire operation, including a major upholstery unit.
Most of the company's debt was taken on to pay for rebuilding costs that weren't covered by an insurance settlement of more than £200 million. But the amount spent on the upholstery division had to be written off after the company found itself unable to recapture the division's sales, which once approached £140 million a year. Customers like La-Z-Boy Inc. had found other suppliers in the interim.
The closure of the division led to the departure of experienced executives. Another long-time leader, manufacturing executive Patricia Fitzpatrick, left after a personal clash with Feuerstein. Then, several years ago, the company's chief lender, BankBoston, balked at increasing the company's borrowing limit and shifted its debt to the current lending group.
Vera Wong climbs in Malden Millsí Polartec protective clothing.
Another challenge was the changing market for Malden Mills' signature Polartec fleece. After years of fast growth, outdoor-goods sales slowed as hikers and other enthusiasts decided their wardrobes already contained enough gear. Meanwhile, cheaper Asian fleece producers began supplying large retailers like Gap Inc.
To boost revenue, Malden Mills developed new products like an electric blanket, and obtained a big Pentagon contract for cold-weather fabrics for soldiers, a deal worth £12 million over three years. But even with a recent order boost from the military, the new sales won't affect the current financial picture. The challenge will be to hang on, Feuerstein said, noting an internal analysis showed the company could post an annual operating profit of £70 million by 2005.
A bankruptcy filing wouldn't be the first for Malden Mills, which also went through a re-organisation in the early 1980s after demand dropped for its previous top product, fake fur. Whatever happens, the company says it expects to continue operating, meeting orders from retailers like Lands' End and Patagonia Inc. that traditionally peak in February.
"Malden Mills is a great business partner of ours and we have every intention of continuing that relationship moving forward", said Patagonia spokeswoman Lu Setnicka.
Another bright spot might be the company's relations with the union that represents most of its workers. Though their contract expires this year, labour leaders seem in no mood to strike or seek steep wage increases.
"They've asked for our co-operation, considering the financial status of the company", said Warren Pepicelli, an international vice president of the Union of Needletrades, Industrial and Textile Employees. He declined to discuss the specific requests but added: "I'm optimistic we'll get a final deal".