Moneybox: The Barneys Mystery

Wall Street is going back to the future. This morning, news broke that a bidding war has erupted between a Japanese retailer and Dubai's state investment fund, Istithmar, over posh retailer Barneys. Last week Citigroup's London headquarters, a tower in the mega-complex Canary Wharf, sold for $2 billion.

Those of us of a certain age—i.e., if you can remember listening to REM cassette tapes on a Walkman—may recall that Barneys and Canary Wharf were high-flying businesses of the 1980s that turned into major fiascos of the 1990s. History's snap judgment was that the families behind Barneys and Canary Wharf (the Pressmans and Reichmanns, respectively) had destroyed major franchises with their hubris and reckless management. When the firms filed for bankruptcy, the ideas behind their businesses—a nationwide superhigh-end clothing store in the case of Barneys, a new high-rise office center in east London in the case of Canary Wharf—were likewise deemed bankrupt.

But the line separating genius and bankruptcy can be a thin one. This month's resurgence of Canary Wharf and Barneys suggests that you should never be quick to pronounce a corporate death sentence.

In the late 1980s, the high-living Pressman brothers, Bob and Gene, decided to take Barneys, the off-price Chelsea clothing store their father started, way upscale and national. As told by Joshua Levine in The Rise and Fall of the House of Barneys, the Pressmans borrowed heavily from a Japanese retailer and spent lavishly to build a palatial flagship on Madison Avenue (which opened in 1993), new stores in Los Angeles and Chicago, and a network of outlets. But the nation wasn't ready for their fashion-forward sensibility. As Jennifer Steinhauer and Stephanie Strom put it in an excellent New York Times postmortem (subscription required), "Retail experts were stunned by the rapid expansion into areas where deconstructionist designs and Savile Row knock-offs were unlikely to fly."

Barneys loudly went bust in 1996, but it wasn't liquidated. It emerged from bankruptcy in 1999 into a climate in which key trends were in its favor. The retailing stories of this decade have been 1) the continuing inroads of high-end status products from the snobby coasts to what I've dubbed the "arugula belt," pockets of sophistication around all big American cities; 2) the rise of a mass class of truly rich consumers who are willing and able to spend; and 3) the emergence of a class of middle-income consumers who scrimp on essentials but trade up and splurge on things they really care about. In 2004, Jones New York got a bargain when it snapped up a rejuvenated Barneys for $397 million. Today, Barneys has stores in Boston, Dallas, Chicago, and Seattle, a new one opening in San Francisco this fall, about 14 smaller co-op stores, and a like number of outlets, including one in San Marcos, Texas. Consigned to the clearance pile a decade ago, Barneys may sell for close to $1 billion. (My money's on the Dubai bidders. Barneys specializes in dressing well-heeled Jewish women from the Upper East Side from head to toe in black. Dubai specializes in dressing well-heeled Muslim women from the Middle East from head to toe in black.)

Like Barneys, Canary Wharf was a multi-generational Jewish family business. Having fled rural Hungary and made a tremendous success in Canadian real estate, the Reichmanns tried to transform a derelict swath of London docklands into a new office center. (Here's the history of the docklands. And here's Anthony Bianco's excellent family biography, The Reichmanns.) It was The Fountainhead meets Leon Uris. Bent on building the tallest building in the United Kingdom, Canada Square, the Reichmanns borrowed heavily. But the orthodox Jews from Canada didn't stand a chance at convincing British establishment firms to leave their ancestral homes in central London. Thanks in part to the difficulties at Canary Wharf, the Reichmanns filed for bankruptcy in May 1992 and lost control of the project. As Bianco notes, the Times of London called Canary Wharf "an ill-conceived act of Tory social engineering."

Canary Wharf emerged from bankruptcy in 1993, and Paul Reichmann was part of the group of investors that acquired it in 1995. As London re-emerged as a financial center and public transportation linked Canary Wharf to the rest of the city, the area became a magnet for British, American, and international financial services firms. As of last December, there were 75,000 people working in Canary Wharf's 24 buildings and five malls. And with London currently undergoing a boom driven by financial services, the construction of Canary Wharf now looks to be a work of genius. (When I went on the London Eye a couple of weeks ago, the most noteworthy sight wasn't the birds-eye view of St. Paul's Cathedral; it was the sheer number of construction cranes.) The 2006 annual report of Canary Wharf Group valued the portfolio of properties at $13.5 billion. And that doesn't even include the buildings the company doesn't own. In April, HSBC sold its Canary Wharf headquarters for $2.2 billion, the largest ever real-estate transaction in the United Kingdom.

Consider how the fates of Barneys, Canary Wharf, and Macy's (another 1980s-era fiasco that is now thriving and the subject of buyout speculation) differ from that of 2001-2002 mega-bankruptcies such as Adelphia, WorldCom, Global Crossing, eToys, and Webvan. These companies disappeared—as both operating companies and as brands—either because of the fraud associated with their failures, or because the business behind the brand didn't have enough of a history to merit resurrection. Generations of successful operation meant that the brand equity associated with Barneys and Macy's didn't simply evaporate because the firms' capital structure went bad. And the demise of the parent company of Canary Wharf didn't alter the geography of London. For truly good business ideas—even ones that are a decade ahead of their time—bankruptcy can be an operating room, not a mortuary.

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