Anthony Luzzatto Gardner, who works for a private equity company in London, takes a close look at the way Romney operated Bain Capital. He argues that Bain’s aggressive, debt-fueled deals were all about turning around quick profits for the company while spreading any losses to employees and other stakeholders in the companies they took over.
What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.
He gives several examples of this:
Thanks to leverage, 10 of roughly 67 major deals by Bain Capital during Romney’s watch produced about 70 percent of the firm’s profits. Four of those 10 deals, as well as others, later wound up in bankruptcy. It’s worth examining some of them to understand Romney’s investment style at Bain Capital.
In 1986, in one of its earliest deals, Bain Capital acquired Accuride Corp., a manufacturer of aluminum truck wheels. The purchase was 97.5 percent financed by debt, a high level of leverage under any circumstances. It was especially burdensome for a company that was exposed to aluminum-price volatility and cyclical automotive production.
Forty-to-one leverage is casino capitalism that hugely magnifies gains and losses. Bain Capital wisely chose to flip the company fast: After 18 months, it sold Accuride, converting its $2.6 million sliver of equity into a $61 million capital gain. That deal, which yielded a 1,123 percent annualized return, was critical to Bain Capital’s early success and led the firm to keep maximizing the use of leverage…
Bain Capital’s acquisition in 1994 of Dade International, a supplier of in-vitro diagnostic products, was 81 percent financed by debt. Of the $85 million in equity, about $27 million came from Bain with the rest coming from a group of investors that included Goldman Sachs Group Inc.
From 1995 to 1999, Bain Capital tripled Dade’s debt from about $300 million to $902 million. Some of the debt was used to pay for acquisitions of DuPont Co.’s in-vitro diagnostics division in May 1996 and Behring Diagnostics, a German medical- testing company, in 1997. But some was used to finance a repurchase of half of Bain Capital’s equity for $242 million — more than eight times its investment — and to pay its investors almost $100 million in fees.
Dade was left in a weakened financial condition and couldn’t withstand the shocks of increased debt payments when interest rates rose and revenue from Europe fell because of a decline in the value of the euro. The company filed for bankruptcy in August 2002, because of its inability to service a $1.5 billion debt load. About 1,700 people lost their jobs while Bain Capital claimed capital gains (net of its losses in the bankruptcy) of roughly $216 million, an eightfold return.
There are many other examples of this debt-fueled strategy. In the two years following the acquisition in 1993 of GS Industries, a steel mill, for $8 million, Bain Capital increased the company’s debt to $378 million on operating income of less than a 10th of that amount. Some of this was used to pay Bain Capital a $36 million dividend in 1994. That degree of leverage was excessive in light of the cyclicality and capital-intensive nature of the steel industry.
By the time the company went bankrupt in 2001, it owed $554 million in debt against assets valued at $395 million. Many creditors lost money, and 750 workers lost their jobs. The U.S. Pension Benefit Guaranty Corp., which insures company retirement plans, determined in 2002 that GS had underfunded its pension by $44 million and had to step in to cover the shortfall.
But private equity doesn’t have to work this way. Private equity funds can also buy companies and make real improvements to make them profitable and sustainable over the long run. And it appears that Bain did some of that too, like with Staples. But these deals show that what it was up to much of the time was buying a company, draining every last drop of money out of them they could get with shady actions that doomed the companies to failure, and then dumping the losses on taxpayers (through the increased cost of social services and pension costs) and other debtholders (who only got a fraction of what was owed in bankruptcy). As Gardner puts it:
Success, entrepreneurship, risk taking and wealth creation deserve to be celebrated when they are the result of fair play and hard work. President Barack Obama is correct in distinguishing the patient creation of value for the benefit of investors through genuine operational improvements and growth — the true mission of private equity — from the form of rigged capitalism that was practiced by some in the industry in the past when debt was cheap and plentiful.
While Bain Capital wasn’t alone in using financial engineering to turbo-charge its returns, it was among the most aggressive under Romney’s leadership. Enriching investors by taking leveraged bets isn’t a qualification for a job requiring long-term vision and concern for public welfare. It is appropriate to point that out to voters.
Indeed it is.
11 comments
1 ping
Skip to comment form ↓
raven
July 19, 2012 at 1:54 pm (UTC -4) Link to this comment
A week ago, I tried to look at Romney’s Bain track record. There is a lot of rhetoric about it, highly slanted depending which party you support.
It was difficult because they did so many deals, the source above says 67, another source says 77.
According to dailykos, 20% of their companies ended up in bankruptcy and another 8% were all but dead.
I’m wondering if any of their deals actually rescued a failing company and made it a continuing concern. With 77 deals, there should be at least one. I didn’t find it, although I read enough to decide Bain was a vulture capitalist firm.
What Romney and Bain did was maximize their profits legally. But it looks like he and his fellow pirate capitalists did it to the detriment of hordes of other people, workers, creditors, and those that depend on them.
slc1
July 19, 2012 at 2:08 pm (UTC -4) Link to this comment
As I cited on the previous thread about Romney, also of interest was the source of some of Bain’s startup funding. Some of it came from shady characters, at least one of whom was later convicted of a felony and another of whom avoided incitement only because he was killed in a yachting accident before he could be charged. However, it should be pointed out that none of this is illegal, although maybe it ought to be. AFAIK, the only think that Romney might be held criminally liable for is lying to the SEC about his position in Bain in the period 1999 – 2002.
http://www.theatlantic.com/politics/archive/2012/07/bain-capitals-most-notable-foreign-founding-investors/260050/
http://www.latimes.com/news/nationworld/nation/la-na-bain-creation-20120719,0,192124.story
raven
July 19, 2012 at 2:22 pm (UTC -4) Link to this comment
That was Maxwell.
It’s not clear if he accidently drowned or committed suicide.
At the time, his financial empire was collapsing. So he went for a swim and never came back. Most people suspect suicide but the only one who knows for sure is gone.
Ben P
July 19, 2012 at 2:54 pm (UTC -4) Link to this comment
I want to say this isn’t quite fair. It’s also very very squishy because you can’t easily define a failing company.
But beyond that you won’t necessarily find examples of a “failing” company being bought by Bain because that’s not what Bain did.
A company is “failing” when it has actual poor business metrics. It is continually in the red, losing market share, in an industry that is dying out.
Bain wouldn’t buy a company like that because that doesn’t fit what Bain did. You can’t convince other people there’s money to be made buying a company that sells VHS tapes
Bain bought “undervalued” companies. That is, companies that have good, or at least decent core metrics, but have other problems that made their stock price low. A bad quarter or year, or a string of years with stagnant growth.
Their stated goal is to buy that company at below what it’s really worth, make short term changes, and then flip it. It helps their own profit numbers that they can often shove the cost of buying the company onto the company itself.
There is also the problem that sometimes “flipping” the company means selling it to a competitor who will ultimately just shut the company down.
Contrast this with what Warren Buffet does. Buffet looks for the same kind of companies, companies that have solid businesses but for one reason or another are battered by the stock market, buys them and puts solid management into place.
Real estate is a good comparison.
Bain is like the kind of real estate investor that buys a run down house at a good price but with no money down, makes the obvious but shallow improvements (look new paint!) and tries to sell it in 90 days. If it works well he makes $30,000 for a couple days work.
Buffett is more like the kind of investor that buys an undervalued house, genuinely fixes it up and then rents it out. Then takes the money and buys a second house and a third etc.
Bain has $30,000 at the end of the month, Buffett might be making $800 a month for 30 years.
yoav
July 19, 2012 at 3:04 pm (UTC -4) Link to this comment
Would mittens now claim that he retroactively retired before these deals were done and therefore can’t be held responsible for them.
grumpyoldfart
July 19, 2012 at 3:11 pm (UTC -4) Link to this comment
That Romney sounds like a bit of a scallywag, doesn’t he?
harold
July 19, 2012 at 3:25 pm (UTC -4) Link to this comment
Also, let’s note a crucial distinction.
There’s borrowing money, with yourself or separate entity responsible for the debt, and then using the borrowed money to buy a company. I don’t think any reasonable person would object to that, assuming that you and the person who loaned you the money were the ones who stood to lose if the company subsequently didn’t make a profit.
Then there’s buying a company, taking over the board of directors, making the company borrow money, making the company use the borrowed money to pay you a huge dividend (that more than repays what you paid for the company and hands you a profit), and then letting the company go bankrupt, not because it wasn’t doing well before, but because it can’t make the payments on the debt – remember, the dividend is yours, personally. (I’m talking about this net effect – if you borrow money first but then force the company you bought to assume the debt or some such thing it’s an example of this.) This is legal but I personally find it distasteful. Basically it’s a shell game in which you cause money to be borrowed, given to you, the loan never paid back, and someone else to get stuck with the bills and go bankrupt.
AND it causes me to wonder who the lenders were, and whether they knew that the loan was going to be used, not for investments to help the company do better, but as a big dividend payment. Because another group of losers, beside the employees, is the shareholders of the lender (or the taxpayers, if the loan is “bailed out”). So I would personally be prone to wonder whether the decision makers at the lending institution were somehow deceived, or had some kind of agenda.
I may be wrong, but it is my understanding that Bain Capital had at least some deals that were basically examples of this. I do not mean to imply that Bain was uniquely predatory, by the way.
d cwilson
July 19, 2012 at 3:51 pm (UTC -4) Link to this comment
That’s how all of Wall Street operates.
raven
July 19, 2012 at 4:17 pm (UTC -4) Link to this comment
Sounds like a great way to…launder money!!!
Anyone seen the Vatican bank or Mormon banks around these deals?
Yeah, I was wondering who would lend a Bain taken over company money. Sounds like a sure way to have the loan go bad and not get paid back.
1. Either the bank or merchant bank was dumb and got stuck. After the first Bain deal or two that went under, no competent bank would lend these deals money.
2. Or the loans must have been collaterized by the company itself. So the bank ultimately ends up owning the company.
I’d like to know too who loaned the money for the leverage. They are either unlucky, dumb, or laundering money.
Area Man
July 20, 2012 at 2:10 am (UTC -4) Link to this comment
I’ve found it hard to get worked up about the whole Bain thing. It’s weird. I’ve given this some thought, and I think it’s because, first of all, I’ve never been foolish enough to believe that the economy works like it’s supposed to in Econ 101, where you have perfect competition, low barriers to entry, completely public information, etc. Market failures and anti-competitive practices are endemic to the way people do business. And it’s understandable that people will take advantage of these things. Bain may have made money by being genuinely productive, or it may have been parasitic, but it almost doesn’t matter. What kind of CEO would Romney have been if he didn’t exercise his fiduciary responsibility to maximize his firm’s profits? Ever since Milton Friedman wrote his infamous treatise on profits being the only thing that matters, CEOs have understood it as their heroic duty to make money by whatever means they can (and to take the biggest cut for themselves that they can).
I for one think that the cultural attitude engendered by St. Friedman is a huge part of the problem, but never mind that. According to Friedman himself, if the problem is that a firm is dumping tons of pollution into the environment causing horrible death to children everywhere, the responsibility to stop this does not lie with the firm, it lies with the law. Which is to say, it’s the government’s job to get rid of the market failures and anti-competitive behavior, and to force firms to make their profits only by giving consumers what they want in an open market with no externalized costs, no asymmetric information, etc. And if so, profit maximization is best for everyone. Kumbaya!
Which brings me to the second and related point, which is that Romney and his Republican friends do not give two shits about the above. They care about the interests of the rich. The efficient (“free”) operation of markets, as properly understood, is not their concern. The clarion call for “deregulation” is almost always for the purpose of getting rid of whatever rules prevent the business elite from dicking over other people. That being the case, who cares about Bain? Even if every penny was earned doing economically productive work, and if all of Romney’s compensation perfectly matched his own productivity, it would still remain that his social class, and not his usefulness, is what makes him a Republican big-shot. And it would still remain that Romney wants massive tax cuts on the rich, evisceration of the social safety net, large increases in military spending, and no plan at all for how to make any of it work.
Which is to say, Romney is a shithole because he wants government policy to ensure that the wealthy elite can piss on everyone else, not because he may have pissed on others given the policy he was operating under at the time.
Marcus Ranum
July 20, 2012 at 9:52 am (UTC -4) Link to this comment
By the way, I noticed a weird thing the other day. If you take the lyrics to NIN’s “Head like a hole” and replace the word “Money” with “Romney” it’s surprisingly prescient. Is Trent Reznor the next Nostradamus??
God Romney I’ll do anything for you.
God Romney just tell me what you want me to.
God Romney nail me up against the wall.
God Romney don’t want everything he wants it all.
[Bridge:]
no you can’t take it
no you can’t take it
no you can’t take that away from me
no you can’t take it
no you can’t take it
no you can’t take that away from me
head like a hole.
black as your soul.
I’d rather die than give you control.
head like a hole.
black as your soul.
I’d rather die than give you control.
[Chorus:]
bow down before the one you serve.
you’re going to get what you deserve.
bow down before the one you serve.
you’re going to get what you deserve.
God Romney’s not looking for the cure.
God Romney’s not concerned with the sick amongst the pure.
God Romney let’s go dancing on the backs of the bruised.
God Romney’s not one to choose
Romney’s Bain Yielded Private Gains, Socialized Losses – Bloomberg | Angry With Unicorns
July 19, 2012 at 10:25 pm (UTC -4) Link to this comment
[...] to add: Hat tip to Dispatches from the Culture Wars.] Share this: This entry was posted in Use the tags, Luke! –> and tagged politics, right-wing [...]