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Obit: Bakery's Failed Recipe -- Employee Buyout

A lapse in product quality, outdated equipment, unprofitable contracts, a huge accounting error, and poor internal communications helped put Martino's Bakery out of business. A business obit.
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The Business: Commercial bakery
Opened: 1926
Closed: April 1998
Causes of death: Old equipment, unprofitable contracts, accounting misunderstandings, and muddled communication

Tempers are hotter than the ovens ever were at Martino's Bakery Inc. The closure of the industrial bakery in Burbank, Calif., is a rare black eye for a publicly traded buyout company accustomed to being the good guy for having saved jobs through employee stock ownership plans, or ESOPs. "It's a sad story," concedes Malon Wilkus, president of the buyout company American Capital Strategies, which is based in Bethesda, Md. "In some cases you can save a company, and in other cases you can't." American Capital Strategies has participated in more than 30 ESOPs, and only 3 have failed, he says.

In 1994, Pepperidge Farm Inc., which had bought Martino's from local owners 14 years earlier, announced that the bakery would be shuttered in 60 days. The bakers union brought in American Capital Strategies, which put up $270,000 of the total price of $2.9 million. In exchange for wage-and-benefits concessions, the 127 employees wound up owning the majority of the company, and all jobs were retained, along with the Pepperidge-installed management team, headed by Daniel Clement.

Martino's problems didn't go away just because the doors stayed open. Downtime on some lines reached 15%--the industry's average is 3%--and recipe changes (such as using a cheaper margarine in the Danish pastry) hurt quality. Disgusted, the workers petitioned American Capital Strategies, which controlled the board with five seats to their four, demanding Clement's dismissal.

The wish was not granted until the fall of 1997, when Wilkus replaced Clement with Harlan Rimer, CEO and president of a Los Angeles bread bakery of which American Capital Strategies was also a minority owner under an ESOP. Rimer figured he'd repeat a strategy that had worked at the Los Angeles bakery--eliminating unprofitable contracts and building the profitable ones--but he couldn't. He discovered, to his dismay, that none were profitable. Even Martino's most dependable contract, with former owner Pepperidge Farm, couldn't grow, because Pepperidge wanted Martino's to install quality-control equipment it couldn't afford. Rimer brought back the old recipes. But Martino's reputation for quality had declined, and it couldn't compete on price because of inefficient production.

Three weeks into the new regime, Rimer says, his team discovered an accounting error that had led to Martino's overdrawing its line of credit by several hundred thousand dollars. The company fessed up to the lender, which, after several unsuccessful attempts to sell Martino's as a going concern, demanded liquidation. Clement disputes that an accounting error occurred, faults the lender for the confusion, and blames American Capital Strategies for not having coughed up some cash from its 1997 initial public offering, which raised $136 million, to bail out Martino's.

Clement isn't the only one angry with American Capital Strategies. Former workers charge that it misled them about the ESOP terms--they say a 10% wage-and-benefits concession suddenly grew to 20%, and the employees' 75% ownership stake shrank to 70%. Completely untrue, counters Wilkus. Poor communication between the managers and employees, everyone agrees, sapped the goodwill necessary for the ESOP's success.

Wilkus consoles himself in thinking that the workers were 60 days from unemployment when American Capital Strategies came to the rescue, forestalling the shutdown until an unusually favorable moment for job seekers. "We've done whatever we could to help these people out," he says, "and thank God it's a strong economy, so they'll come out of it OK." --Eric H√"bler

Last updated: Sep 1, 1998




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