In Depth November 26, 2008, 5:00PM EST

How Private Equity Strangled Mervyns

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Numerous others say they're asking their families for help—from single mother Barbara Durden, who's leaning on her brothers, to marketing veteran Katherine Begley, who may have to move herself and her husband (who suffers from Alzheimer's) into the home of her 93-year-old father. David Magallon, a former security manager and father of three girls, says he has cut off his family's cable TV and turned off the heat. "There is no money," he laments. Christmas this year will be "stuff that we make, and cards."

On Nov. 20, employees filed a suit against Mervyns seeking class action status, alleging the company violated the law by not giving them 60 days notice that they would be terminated. Mervyns declined to comment on pending litigation.

The collapse has prompted many Mervyns lifers to rue the day the company was sold to private equity. "I feel like we were robbed," says Zialcita. Private equity "is so nasty." Devastated by her experience, she vows never to work for a company again. Zialcita now hopes to start a wedding floral business.

Morris, meanwhile, is heartbroken to see the chain he built crumble. "There was no way it could survive," he says. On Oct. 23, having gotten a call from Goodman's assistant asking if he wanted to pick up some old pictures, he stumbled into the company's final day of existence before liquidation. "I couldn't believe it," he says. His wife, he says, had one thought when she heard about the bankruptcy: "Maybe you shouldn't have sold the company."

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An Off-Target Proposal?

Hedge fund manager William Ackman, whose Pershing Square Capital Management owns nearly 10% of Target (TGT), has been pressing the retailer to spin off its property holdings into a publicly traded real estate investment trust. Ackman claims the move would improve cash flow and lift Target's sagging stock to 70. But in a Nov. 21 statement, Target rejected Pershing's proposal on the grounds that it would adversely affect its investment-grade credit rating.

To view Pershing's proposal and related documents, go to http://bx.businessweek.com/hedge-funds/reference/

With John Cady

Business Exchange related topics:
Private Equity
Retail
Credit Crunch

Thornton is a senior writer for BusinessWeek.