What the Family Dollar Merger Says About American Capitalism

The store's deal with Dollar Tree is a boon to executives, but it will probably hurt employees.
More
Jim Young/Reuters

The French economist Thomas Piketty could not have dreamed up a better illustration of the problematic and growing income inequality in the US than the Family Dollar-Dollar Tree combination.

Let’s start with the backdrop: Essentially, the lower-income Americans that are the target customers of dollar stores have gotten too poor to buy anything other than food (a vivid illustration of Piketty’s point about income inequality). That has depressed margins and profits at these discount retailers.
 
The fact that these poor Americans—and the retailers that serve them—are doing so badly attracted the attention of some of the richest and best-connected investors in the world. Funds associated with the activist investors Nelson Peltz and Carl Icahn have snapped up significant chunks of Family Dollar in recent months—as has the hedge fund manager John Paulson.
 
And they have been pushing for a sale. Which makes sense, from their point of view: Combined, they stand to earn hundreds of millions on the deal, at least on paper. (Again, the fact that financiers have done well on the deal, even as low-income folks struggle, squares with Piketty’s view that large fortunes tend to grow faster than overall income, resulting in mounting piles of capital owned by the wealthy.)
 
Other people that stand to earn a tidy sum on the merger? Well, Family Dollar’s CEO Howard Levine owns roughly eight percent of the shares outstanding, so the deal price would land him with paper gains of about $130 million.
 
But it'd be a stretch to say Levine deserves it. The entire reason the company was pushed to sell by the activist investors was because its numbers under Levine haven’t been great. The fact that a CEO at the helm of a struggling company is able to harvest such a rich payout is quite in keeping with Piketty’s contention that outsized pay packages for corporate executives—even when there is less-than-clear evidence that they’re deserved—are key drivers of US inequality. 
 
On top of that, as if to emphasize the points about the growing importance of inheritance that Piketty makes in his book Capital in the Twenty-First Century, Levine is the son of the firm's founder, Leon Levine. (We put in a request to Family Dollar asking for comment, but haven’t heard back.)
 
It's not even clear that the merger will lead to a healthier retailer in the long run. It's being financed by roughly $9.5 billion in borrowings. The debt used to finance the deal could result in a credit rating cut for Family Dollar, which is already flirting with junk status, Bloomberg notes. In other words, Family Dollar could be in worse financial shape after the deal, not better.
 
So what’s next for the company? A wave of cost-cutting, aimed at helping the combined dollar-store giant take advantage of the significant synergies and efficiencies that the deal creates. While the companies have said they don’t plan on closing stores, cost-cutting waves usually aren’t great for employees.
 
In short, this deal—prompted by the hardship of low-income customers—leaves a few well-connected investors, executives, and the bankers who arranged the deal much better off, as the finances of the business, its customers, and, perhaps, its employees languish.
Jump to comments
Presented by

Matt Phillips is a reporter at Quartz, where he writes about finance, markets, and economics.

Get Today's Top Stories in Your Inbox (preview)

Why Do People Love Times Square?

A filmmaker asks New Yorkers and tourists about the allure of Broadway's iconic plaza


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Why Do People Love Times Square?

A filmmaker asks New Yorkers and tourists about the allure of Broadway's iconic plaza

Video

A Time-Lapse of Alaska's Northern Lights

The beauty of aurora borealis, as seen from America's last frontier

Video

What Do You Wish You Learned in College?

Ivy League academics reveal their undergrad regrets

Video

Famous Movies, Reimagined

From Apocalypse Now to The Lord of the Rings, this clever video puts a new spin on Hollywood's greatest hits.

Video

What Is a City?

Cities are like nothing else on Earth.

Writers

Up
Down

More in Business

Just In