Leveraged Buyouts and Local Timber

Here in Southern Oregon, the timber industry used to be undisputed king.  Locally, thousands of jobs depended on logging, trucking and milling.  Then in the 1980s most of the jobs dried up.  Those of us who were here were pretty sure we knew why:  it was those darned environmentalists and that silly spotted owl.  Wasn't it?

Actually there were two factors that decimated timber jobs, neither of which received much attention at the time.  The first was exports.  From the late 1970s until the late 1980s, a decade when jobs in the industry declined, timber harvests actually went up.  Here's the data on employment by county (Source):

Oregon timber employment fell from 81,376 in 1978 to 69,473 in 1988.  At the same time, timber harvests actually increased from 8 to 9 billion board feet.  What was happening?  We were still harvesting, we just weren't milling and mills closed down.  Logs were heading straight for the port of Coos Bay for Asian markets.  And why did this change?

It changed not just because prices were higher in Asia.  It changed particularly because locally-owned mills and timberlands were bought out by investment firms, firms much like Bain Capital.  Many of these were hostile takeovers that happened when mills were struggling to make money but still owned vast assets, primarily standing timber.

I remember local headlines regularly about this local timber business or that one being swallowed up -- usually in leveraged buyouts -- by companies in Texas, Arkansas and Colorado, companies that had no vested interest in our community.  Tax laws in the 1980s became very favorable to this sort of buyout; timber profits were subject only to the 15% capital gains tax rate, could write off equipment purchases long before they fully depreciated and, if they formed certain timber partnerships, could avoid corporate taxes all together.  (Source)

When we talk about leveraged buyouts, understand that what's being leveraged is the company being bought out.  To purchase a local timber business, a buyout firm could mortgage the local business to pay for its purchase.  To make a quick profit, sell off the assets -- the timber on company lands -- and then close or dump the company.  Typically the investors were able to reap a quick and handsome profit without ever investing in the business.  The timber alone was worth more than the buyout price.  Then sell to the highest bidder, Japan.

Contrast this with the local family businesses -- Rough and Ready Lumber, Glendale Forest Products and others -- who lived and participated in their local communities.  Yes, they were interested in harvesting timber from federal forests and certainly they had differences of opinion with local environmentalists.  But what was different -- what was healthy for our communities -- was that these businesses were actual job creators, actual contributors to community efforts, actual supporters of our schools and local development.  Milling the timber harvested locally is a world away from loading logs on an outbound steamer.

When I hear talk of leveraged buyouts, I don't think about corporate offices in Boston or how wealthy some Harvard grads became.  I think about my neighbors and the good manufacturing jobs that used to support their families.