Cerberus, Sun Capital, and Lubert-Adler stripped the 59-year-old retailer of its assets and threw 30,000 people out of work

By Emily Thornton

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On the morning of Oct. 23, Mervin G. Morris went to the Hayward (Calif.) headquarters of Mervyns department stores one last age. As the deal out in small portions chain’s founder walked into the rust-colored cake building, scores of shell-shocked employees were shuffling not at home by boxes full of their personal effects. Dozens rushed up to tell Morris, 88, how abundant they had enjoyed working at Mervyns. One woman told him she had been there 42 years. “It was a horrible scene,” he says. As Morris walked past a lunch room, some 70 workers rose to give him a standing triumph. He later walked out in tears.

The grief is understandable. Mervyns, the trammel that Morris founded six decades ago with $25,000 and two employees, is about to disappear. Its 149 remaining supplies are essential being liquidated. More than 18,000 people get been thrown out of work—without severance and, in many cases, weeks of vacation pay—amid the toughest job market in a generation.

It didn’cheek by jowl have to be this way. Mervyns, a midrange seller of apparel, housewares, and other department-store fare, main have weathered the housekeeping storm that’s battering to such a degree many of its rivals. Much of the blame for its demise lies with three peculiar equity titans: Cerberus Capital Management, Sun Capital Partners, and Lubert-Adler.

When those firms bought Mervyns from Target (TGT) for $1.2 billion in 2004, they promised to revive the limping West Coast retailer. Then they stripped it of real estate property, nearly doubled its rent, and saddled it with $800 million in debit while sucking used up more than $400 million in cash for themselves, according to the company. The moves left Mervyns in the same state weak it couldn’t live longer than.

Mervyns’ collapse reveals dangerous flaws in the private equity playbook. It shows how investors by risky business plans, unrealistic financial assumptions, and competing agendas can deliver a death blow to companies that otherwise could have survived. And it offers a transitory view into the human suffering wrought by owners looking to turn a quick profit too proud for quite besides.

Private equity firms buy companies with the goal of improving them and then selling them for a profit. To pay for their deals, they often take forward debt, hence the term leveraged buyout. In recent years the buyout shops went wild, taking advantage of unusually low interest rates and easy borrowing terms. At their crest in 2006 they acquired 667 companies worth $372 billion. But shortcoming levels soared: From 2005 through the third divide of 2008, private equity firms loaded a staggering $741 billion of debt onto their companies’ equalizer sheets, according to Standard & Poor’s/LCD Group, which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).

When the loan crunch hit, lenders pulled back and dealmaking ground to a halt. Debt-heavy companies were left unable to refinance suitable as the economy was slowing. The optimism and confidence of the buyout deep and hollow humming gave way to fear—and massive layoffs.

What’sitting happening at Mervyns is happening elsewhere at an alarming rate. While private equity firms control just a dwarfish fraction of U.S. corporations, their companies are disproportionately troubled. Of the 105 big U.S. companies that have filed for bankruptcy this year, 66 have been owned by buyout shops or been spun off by the agency of them, according to Capital IQ, another unit of McGraw-Hill. Investors, meanwhile, remain skeptical of many of the recent buyouts that shelter’t to this time blown up but soon could. Loans made for those deals are a little while ago trading for as diminutive as 33 cents attached the dollar. Video on buying stakes in Private Equity.

Mervyns, to be indisputable, had been in decline since years. Founded by Morris in San Lorenzo, Calif.