The Real Problems with Romney: Bain Capital

Lately Republican Presidential Wannabe Mitt Romney has been trumpeting all of the jobs he created through his 15 year association with Bain Capital. It’s one of those claims that triggers a “Huh?” reaction from anyone who understands leveraged buy-outs and the track record of LBOs over the last 25 years. Some of Romney’s running mates have produced some amazingly anti-capitalism advertisements in response to Romney’s claims. After all, this is the stuff that led to classics like Barbarians at the Gates, Connie Bruck’s The Predators Ball and James Stewart’s Den of Thieves. They are stories of some of the truly reprehensible instances of capitalism and cronyism run amuck. These are Romney’s buddies.

But still, Romney’s claim to have created “tens of thousands of jobs” through his association with Bain Capital is worth closer examination.

WC will open with a reality check: Bain Capital didn’t “create” any jobs. At the very best, as a venture capital outfit it provided some of the startup capital to entrepreneurs that those entrepreneurs used to build companies that “created” jobs. Of course, in the case of Romney-funded start ups like Staples, the office products chain, the jobs were “created” by out-competing thousands of existing small, mom and pop office supply stores, and replacing those entrepreneurs with minimum wages clerks at Staples. So only in the very loosest sense of the word, yeah, Bain’s venture capital operations “created” jobs.

But Bain Capital’s primary business wasn’t venture capitalism; it was leveraged buy-outs, LBOs. And no matter how frantically you spin it, LBOs don’t create jobs. They kill jobs. Some background.

Outfits like Bain Capital will tell you they look for “underperforming” companies, buy them, make them more “efficient,” and then sell them. That’s  a dizzying spin on a much dirtier business.

What the Bain Capitals of the world look for is a company whose assets are largely debt-free, with a shareholder base who are likely to sell. Bain Capital then acquires a block of shares in the company, and then offers to buy the majority of the remaining shares at 1.5 – 4 times the current price. But they don’t spend Bain Capital’s money to buy those shares; instead, they borrow money and secure the loans in those unencumbered assets of the target company. That’s the “leveraged” in LBO. They spend the target company’s equity, its net worth, to buy the company.

So when the dust settles, Bain Capital owns or controls a majority of the shares in the target company. The target company, which once had a strong balance sheet, now has immense debt obligations. To make the target profitable again, expenses have to be reduced. Labor is the biggest, easiest target. Either directly, in the form of cutting employees, or indirectly by reducing salaries and benefits. Usually, both. Because cash is in short supply – all of that debt has to be paid – management, Bain Capital and its Romneys, are paid in shares in the target company.

And then, as quickly as possible, what’s left of the target company is sold. Bain Capital makes money on the sale of its shares, mostly on the ones that it received as compensation. Remember, Bain doesn’t have much invested; it borrowed the money used for the purchase, not on its credit, but on the target company’s, secured in the target’s assets. Most of the money Bain gets for its shares is profit. And the target company struggles to survive with the vastly altered balance sheet, significant debt service and a greatly reduced work force.

Vanity Fair reports that 38% of Bain Capital’s targeted LBOs went into bankruptcy. That doesn’t mean Bain Capital lost money on the deal; even in liquidation, LBOs pencil out pretty well for the predators like Bain. For those companies, Bain killed ALL of the jobs. For the “successful” deals, Bain only kills some of the jobs.

Careful readers will have noticed there were no jobs created in the LBO process. Zero. None. Exactly the opposite. Jobs are destroyed. And to a large extent, jobs paying a decent wage are replaced with much lower-paying jobs. Bain added no value to the target company. It simply turned balance sheet equity into huge dividends for Bain, at the expense of the target’s financial stability. According to the New York Post,

Romney’s private equity firm, Bain Capital, bought companies and often increased short-term earnings so those businesses could then borrow enormous amounts of money. That borrowed money was used to pay Bain dividends. Then those businesses needed to maintain that high level of earnings to pay their debts…

* Bain in 1988 put $5 million down to buy Stage Stores, and in the mid-’90s took it public, collecting $100 million from stock offerings. Stage filed for bankruptcy in 2000.

* Bain in 1992 bought American Pad & Paper (AMPAD), investing $5 million, and collected $100 million from dividends. The business filed for bankruptcy in 2000.

* Bain in 1993 invested $60 million when buying GS Industries, and received $65 million from dividends. GS filed for bankruptcy in 2001.

* Bain in 1997 invested $46 million when buying Details, and made $93 million from stock offerings. The company filed for bankruptcy in 2003.

Romney’s Bain invested 22 percent of the money it raised from 1987-95 in these five businesses, making a $578 million profit.

WC is a birder, so let’s put this in terms of birds and birding. Vultures are carrion-eaters. They are equipped by evolution and nature with quite good tools to eat dead and dying critters. It’s a useful niche. But WC wouldn’t expect to hear the vultures, eating a rotting carcass, boast about improving the species upon which they are dining. Or claim to be creating anything, except more vultures.

But this is politics, and mighty dirty politics. It’s unfair of WC to use real vultures to draw a comparison.