The Twinkie Recipe for Bankruptcy: Why Hostess Workers were Willing to Risk Liquidation

Mon, 2012-11-19 17:40

By Alan Sable, Associate Consultant

On Friday, the Hostess Company, maker of Twinkies and other confectionery goods, announced that it would liquidate its operations and cease
production effective immediately. The company was quick to blame striking workers from the bakery union for forcing the company to close. This story begs the question of why union workers would continue a strike when they had been told by management that, if they continued, the company would begin to sell of its assets and the workers would lose their jobs. Members of the Teamsters union, who also worked at Hostess, had already accepted management’s last contract offer, yet the bakery workers voted by 92% to continue their strike. From the recent news reports two reasons seem to explain this seemingly counter intuitive position. The first reason is that workers did not trust management and did not believe the companies threats. The second reason may be because younger workers are better off under the current liquidation than if they had gone back to work and accepted management’s contract.

Hostess management told workers that if they did not end their strike by Thursday the company would be forced to liquidate. According to the Wall Street Journal, Hostess had threatened liquidation earlier this year if either of the two unions voted down their final offer. When the Bakers' union voted down the contract offer, Hostess went to bankruptcy court to impose its terms rather than liquidate. Hostess had cried wolf before and workers may have thought that the Friday deadline was another idle threat.

Yet, trust between management and the unions at Hostess had broken down long before the most current strike. Hostess went through a managed bankruptcy previously between 2004 and 2009. A combination of union concessions of over $110 million dollars, including thousands of layoffs, an infusion in capital from a private equity company, and a restructuring of the company’s debt, allowed Hostess to emerge from bankruptcy (see David Kaplan’s detailed article in Fortune for the specifics). According to Jay Carney at CNBC, “What happened next was just a mess. The CEO quit. The unions described the pay of the new CEO as ‘looting.’ Acrimonious would be a very mild term to describe relations between management and the unionized workers. One person familiar with the matter described it as ‘all-out war.’” Hostess asked for, and received from bankruptcy court, a $1.5 million dollar raise for the CEO and 80% raises for nine top executives. Workers felt their sacrifices had been used to reward the same management that that was driving Hostess into the ground. Thus earlier this week when Hostess threatened to liquidate the company, workers saw it as the latest attack in the “all out war.” With no trust between workers and management, the workers called Hostess’s bluff and lost. Or did they?

Younger workers may have preferred the liquidation to accepting Hostess’ final contract offer. When a company with a pension plan gets liquidated all employees become immediately 100% vested in the pension. For many pension plans becoming 100% vested can take up to 10 years. Thus Hostess’ decision to liquidate has insured that younger workers will get the full value of pension credit they accrued. Had the members of the bakery union accepted Hostess’ final contract offer, their pension would have been frozen (though I am not sure if they would have continued to earn vesting credit). Still, it is hard to believe that, all things being equal, workers would run the risk of losing their jobs simply to ensure they become vested in a pension where they have little credit. But all things were not equal. In addition to freezing the pension, Hostess’ final offer included at least a 27% cut in compensation for workers over the life of the contract including 8% pay cuts effective immediately. Also, workers health insurance premiums would go up dramatically. These cuts would compound with the earlier round of cuts from 2009. CNNMoney reported that:

Mike Hummell, a receiving clerk and a member of the Bakers' union working in Lenexa, Kan., said he was making about $48,000 in 2005 before the company's first trip through bankruptcy. Concessions during that reorganization cut his pay to $34,000 last year, earning $16.12 an hour. He said the latest contract demands would have cut his pay to about $25,000, with significantly higher out-of-pocket expenses for insurance. "The point is the jobs they're offering us aren't worth saving," he said Friday. "It instantly casts me into poverty. I wouldn't be able to make my house payment. My take-home would be less than unemployment benefits. Being on unemployment while we search for a new job, that's a better choice than working these hours for poverty wages."

Workers who quit to find better jobs because they could not afford the cuts would have lost their pension credit, if they weren’t vested, and
would have received no unemployment. As a result workers may have preferred liquidation in which they could vest in their pension and receive unemployment while looking for a better job, rather than see their standard of living cut so dramatically. Younger workers in particular, with more to gain from a vested pension, plus a better outlook for finding other work, may have seen this as a better option than accepting Hostess’ contract. The fact that the Teamster workers at Hostess voted to accept the contract (though only by a slim margin), while the bakery workers voted to reject the offer and go on strike, would make sense if the bakery workers are significantly younger.

The situation that Hostess workers were in was lose-lose. Either they accepted dramatic reductions in their pay and benefits and bet that Hostess would turn around, or they risked losing their jobs. Given Hostess track record during the last six years, with the CEO changing six times, two managed bankruptcies, (the first of which left them deeper in debt than when they entered it), and management betting on a Twinkie cookbook to reinvigorate the brand (including recipes for Twinkie Sushi and Pigs-in-a-Twinkie), workers may well have believed that liquidation was inevitable. The Washington Post reports that Hostess management is, “seeking court permission…to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation.” Top executives know that Hostess is going under and want make sure they get something before it sinks. The bakery workers at Hostess may have realized that Hostess was sinking sooner than the executives. Either through a favorable labor deal, or by taking their pension and unemployment and working for a better company, the bakers weren’t afraid to risk their jobs in order to hold on to their middle class standard of living.

The New York Times reported today that Hostess and the bakery union agreed to seek mediation in a last minute effort to avoid liquidation. A successful outcome may hinge on whether Hostess can convince younger workers that they have a future with Twinkies.