Mitt Romney And The Devastation Of Vulture Capitalism
Benjamin Wallace-Wells, and other apologists for Mitt Romney's Mormon version of Ayn Rand's glorification of undiluted selfishness and greed, may try painting Romney's life at Bain Capital as some kind of technocratic whiz kid act, but there are thousands of employees at dozens of companies that fell prey to Romney's brand of vulture capitalism that can tell a very different story. Romney had already receded into the Bain background before his company, using his formula, had taken over, pillaged and destroyed Warner Bros Records. President of one of the divisions-- Reprise Records-- I've written about it in the past.
[A] failing AOLTimeWarner sold off Warner Music-- which included the record divisions-- to a consortium of investors that included, prominently, Bain Capital, the vulture firm (that's actually what it's called) run by Mitt Romney, who hopes to propel himself to the White House by claiming to be a job creator. He wasn't; he was a job destroyer-- as a business strategy. In 2008 the Boston Globe explained the Bain strategy of slashing jobs.
A few weeks ago a much-diminished Warner Music sold itself to a Russian Mafia character (an oil billionaire)-- and inside player who was already on the Board-- who basically bought it for the debts it had accrued while Bain and the rest of the consortium destroyed what was once the world's greatest record company and turned it into nothing at all... shedding 4/5 of the employees in the process. That's the Romney job creation prowess. We had over 500 people working at Warner Records USA when Bain came along. Now there are less than 100. And, in the process, Bain made a fortune and everyone else lost, especially the artists and the public and... music. As the Globe explained, Bain "specializes in leveraged buyouts. Leveraged buyouts combine small amounts of investors' money with large amounts of borrowed money to buy established companies, increase their value, and resell them at a profit."The primary objective, of course, was to make money. That meant every job couldn't be saved. Some strategies, such as a roll-ups, are designed at the outset to cut jobs. In roll-ups, similar firms in the same industry are acquired and combined to boost revenues while eliminating duplicative jobs, particularly in administrative areas such as payroll, personnel, and information technology.
Bain embarked on a roll-up after acquiring Ampad in 1992. Two years later, Ampad bought the office supplies division, including the Marion, Ind., plant, of typewriter maker Smith Corona. Ampad shuttered the Indiana plant in 1995, moving equipment and production to other Ampad factories.
In 1996, another Bain company, Dade International, a maker of medical diagnostic equipment, bought a similar unit of E.I. du Pont de Nemours and Co., of Wilmington, Del. Dade soon shut down two plants and cut more than 700 jobs, according to government filings. The next year, Dade merged with Behring Diagnostics, a German company, to form Dade Behring Inc. Dade Behring shut three US plants, affecting more than 1,000 workers, some of whom were offered transfers to other facilities.
Sometimes, Bain cut jobs to right underperforming companies. In 1997, after acquiring Live Entertainment, later known as Artisan Entertainment, the producer of the hit film Blair Witch Project, Bain slashed 40 jobs, about 25 percent of the workforce, according to the Hollywood Reporter. Midwest of Cannon Falls, Minn., a giftware distributor, cut 40 jobs, or about 10 percent of its workforce, less than a year after Bain bought a "significant" stake in the company.
In assessing deals, Romney and partners didn't consider whether they saved or created jobs, according to a former Bain employee who requested anonymity, citing confidentiality guidelines. When Bain partners discussed shutting down failing businesses in which they invested, Romney never suggested they had to do something to save workers' jobs. "It was very clinical," the former employee said. "Like a doctor. When the patient is dead, you just move on to the next patient."
...Ampad, too, became squeezed between onerous debt that had financed acquisitions and falling prices for its office-supply products. Its biggest customers-- including Staples-- used their buying power and access to Asian suppliers to demand lower prices from Ampad.
Romney sat on Staples's board of directors at this time.
Creditors forced Ampad into bankruptcy in early 2000, and hundreds of workers lost jobs during Ampad's decline. Bain Capital and its investors, however, had already taken more than $100 million out of the company, in debt-financed dividends, management fees, and proceeds from selling shares on public stock exchanges.
By the time Ampad failed, Randy Johnson, the former union official in Marion, Ind., had moved on with his life. After the Indiana plant shut down, he worked nearly six months to help the workers find new jobs. He later took a job at the United Paperworkers union.
"What I remember the most," said Johnson, "were the guys in their 50s, breaking down and crying."
In his reply to Johnson's letter, Romney said the Ampad strike had hurt his 1994 bid to unseat Senator Edward M. Kennedy, and no one had a greater interest in seeing the strike settled than he.
"I was advised by counsel that I could not play a role in the dispute," Romney explained, adding, "I hope you understand I could not direct or order Ampad to settle the strike or keep the plant open or otherwise do what might be in my personal interest."
Hiding behind lawyers is an easy way out for CEOs. But it doesn't make for a good leader or good leadership. Lawyers gave me advice all the time-- like to drop Depeche Mode or Joni Mitchell or Eric Clapton because their last record wasn't performing up to par. I always listened politely and then did the right thing, never something I would have to explain was something some effin' lawyer told me to do.
In yesterday's NY Times, Michael Barbaro took a deeper look at Romney's devastating and profoundly amoral business practices and what comes out is not anyone in their right mind would consider for the presidency of the United States-- unless your ideal chief executive is a Gordon Gekko or Bernie Madoff. The Times feature is perfectly titled to distill down an essence of Romney as a businessman: "After A Romney Deal, Profits And Then Layoffs." Barbaro starts with the story of Romney's buyout of Dade, an Illinois medical firm. On first glance it looks like a good deal-- and Romney's firm harvested a tidy $242 million fee before driving the company into utter ruin and bankruptcy.
But an examination of the Dade deal shows the unintended human costs and messy financial consequences behind the brand of capitalism that Mr. Romney practiced for 15 years.
At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. And in waves of layoffs, it cut loose 1,700 workers in the United States
Friday we examined Romney through the Wall Street prism he's asking voters to look at him through. Very ugly. We followed Professor David Korten's contrast been the sustainable, community-oriented Main Street business model and the death culture that is the formula for unrestrained avarice that is the corporate Wall Street model, the Romney model, the 1% model. "Wall Street," he writes, "is a world of pure finance in the business of using money to make money by whatever means for people who have money. Any involvement in the production of real good and services is purely an incidental byproduct. Maximizing financial return is the game. To that end, Wall Street institutions have perfected the arts of financial speculation, corporate-asset stripping, predatory lending, risk shifting, leveraging, and debt-pyramid creation. Successful players are rewarded with celebrity, extravagant perks, and vast financial fortunes. Wall Street players justify their actions with the claim that they are creating wealth for the benefit of society, a convenient bit of self-delusion... [M]ost Main Street businesses function within a framework of community values and interests that moderate the drive for profit." Romney never created any wealth or made any products; he just manipulated a corrupt business model for profits for himself and his business partners. His record of Bain is one that should send him to prison, not to the White House. After reading Barbaro's Times piece yesterday, I prayed to God to spare America this catastrophe of its own making.
From 1984 to 1999, Mr. Romney and his deputies made fortunes by investing in, acquiring and then selling about 150 companies. It was high-stakes work that shaped Mr. Romney’s values and views, taught him the art of salesmanship and negotiation and took him deep inside the boardrooms and factories of American business.
Because financial data for many of the acquisitions are not publicly available, it is difficult to fully tally the wins and losses, the jobs created and the jobs eliminated on Mr. Romney’s watch. But the experience with Dade, Bain’s biggest transaction at the time, shows how Bain managed its investments, structuring deals so it would be hard for Mr. Romney and his partners not to come out ahead.
Bain and a small group of investors bought Dade in 1994 with mostly borrowed money, limiting their risk. They extracted cash from the company at almost every turn-- paying themselves nearly $100 million in fees, first for buying the company and then for helping to run it. Later, just after Mr. Romney stepped down from his role, Bain took $242 million out of the business in a transaction that, according to bankruptcy documents and several former Dade officials, weakened the company.
Even some people who benefited from that payday and found it reasonable at the time now question it. “You would have to say, looking back, that it was too large, because it pushed us into bankruptcy,” said Robert W. Brightfelt, a former Dade president who collected more than $1 million.
...Romney the candidate can still frequently sound like Romney the C.E.O. On the campaign trail, he has taken a tough-love approach to the economy, suggesting that the best remedy for the housing market is to allow foreclosures to “hit the bottom”; railing against wasteful spending by the government-backed solar company Solyndra; and arguing that companies with poor strategies, like General Motors, should be allowed to go bankrupt, without a federal bailout.
It was the same approach he took with Bain, as he explained in an interview with the New York Times in 2007, when asked about layoffs at the companies he bought.
“Sometimes the medicine is a little bitter,” he said, “but it is necessary to save the life of the patient.”
In the early 1990s, as the American economy rebounded from a recession, the biggest names in the buyout business hungrily eyed Dade, then a little-known maker of medical technology based in Deerfield, Ill.
It was ripe for a takeover. Its main product, copy-machine-size units that ran blood tests in hospitals, laboratories and doctors’ offices, was widely used but rife with problems. Dade’s owner, the giant health care company Baxter International, was ready to dump its aging diagnostic division.
Bain impressed Baxter’s management with its vision for how to fix the ailing business. Mr. Romney, who began Bain Capital in 1983, prided himself on turning around companies like Dade-- not just polishing them for sale, as their quick-buck Wall Street colleagues did.
It was the Bain Way, reflecting the firm’s roots as a spinoff of the venerable consulting firm where Mr. Romney had been a star performer, Bain & Company. At age 36, Mr. Romney was asked by the founder, William W. Bain Jr., to jump into the relatively new, risky and extraordinarily profitable business of private equity.
The idea was tantalizing: raise money from a pool of investors, like wealthy families and public pensions; buy a struggling company using a small amount of cash and a lot of financed debt; improve its operations; and then sell it for a profit.
By marrying traditional financial engineering with management consulting, Bain Capital produced much higher returns than its rivals.
“They were unusual in doing that in the ’80s,” said Steven N. Kaplan, a professor of finance at the University of Chicago, who has studied the private equity business. “Romney figured it out, and everyone else copied it.”
Bain Capital was a partnership, but there was no question who was in charge: as the owner of all the voting stock, Mr. Romney controlled the profits and the power.
He did not act like a big shot-- he bypassed his secretary to make photocopies himself and left the building to buy himself lunch. But his values prevailed: he insisted on cheap, spartan office decorations (the original desks contained no wood) and introduced fines for executives who arrived late to meetings (when he once had to pay a $20 penalty, he looked physically pained, a co-worker recalled).
Colleagues remember him as a heavily perspiring, deeply anxious presence for much of the first year, constantly worried that he might tarnish the good name of Bain & Company by fumbling at Bain Capital.
“There was enormous pressure on Mitt not to have any bad investments,” recalled Geoffrey S. Rehnert, an early managing director at Bain Capital. The message from Bain & Company was “don’t do anything that embarrasses us.”
Mr. Romney did not. In just a few years, Bain Capital made eye-popping sums of money in deal after deal-- “the golden goose” that was laying “golden eggs,” as he would later call it.
Mr. Romney nurtured startups like the fledgling office supply chain Staples, at times over the objections of skeptical Bain partners. Its 1986 investment of about $2 million netted Bain Capital $13 million.
Some of the first buyouts were even more lucrative. Bain Capital earned $34 million, 34 times its 1986 investment, in Calumet Coach, a manufacturer of medical equipment, for example. It made $55 million, 16 times its 1990 investment, in the Gartner Group, a technology research firm, according to documents sent to potential investors.
Young executives became wealthy overnight. “It was a heady experience,” Mr. Rehnert remembered. “It was life altering, because we could pay down mortgages or buy bigger houses or new cars at a stage in life when those were big luxuries, ahead of our peers.”
As Bain Capital expanded, Mr. Romney cut back his travel to the headquarters of companies, assigning to lower-level executives the task of scouring balance sheets and interviewing managers. But he reviewed the numbers and signed off on major acquisitions, like the Dade purchase.
“He certainly approved the deal, understood it, had presentations made to him regarding it,” recalled Scott Garrett, Dade’s chief executive at the time. “He became quite knowledgeable about the business.”
In the waning days of 1994, a small group of investors led by Bain Capital, including Goldman Sachs, paid $450 million for Dade. Bain invested about $30 million.
Dade employees could always tell when Bain Capital executives were in town: their bosses worked longer hours.
“The thing Bain brought was urgency,” Mr. Brightfelt said. “It was 24 hours a day. It never stopped.”
At Dade’s headquarters, the men from Bain-- young, nattily dressed Bostonians-- exerted themselves in ways big and small as the new owners. They took a majority of seats on the board of directors. They interviewed candidates for high-level jobs. They negotiated crucial contracts with suppliers. And they requested reams of data.
In 1995, Bain officials debated whether Dade should buy a competitor, a diagnostics division of DuPont Medical Products that owned technology vital to Dade’s future. Some Bain executives advocated quickly selling off Dade for a tidy profit. Others counseled patience, arguing that Bain could collect even more by investing in the company for a few years.
Mr. Romney, in Bain’s boardroom in Boston, listened intently to both sides and rendered a verdict: Dade should acquire the DuPont unit. Mr. Romney “wanted to double down on Dade,” Mr. Garrett recalled.
In back-to-back acquisitions, Dade bought the DuPont diagnostics division in 1996 and a German medical testing company, Behring, in 1997, whose products replaced or improved upon Dade’s.
Renamed Dade Behring, it became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers.
The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast-- Dade’s long-term liabilities, which surged to $816 million from $298 million.
Cost-cutting became a mantra inside the company. After his employer, DuPont, was bought by Dade, William T. Mowrey, a field engineer, said his generous pension plan was replaced by a 401(k); his salary was cut by $1 an hour, costing him $2,000 a year in income. When he filed for overtime, he said, his new bosses refused to pay it. “They were just trying to milk as much out of us as they could,” he said.
Mr. Mowrey, now 54, quit. Many workers, like Mr. Shoemaker, the Dade employee in Westwood, and his wife, a temporary employee at the same plant, did not leave on their own terms. When they lost their jobs in 1997, they had to abandon plans to buy their first home together. “It created a lot of stress,” said Mr. Shoemaker, 59, who had earned more than $80,000 a year.
For some, the emotional effects of the layoffs outweighed the financial repercussions. Soon after Dade bought the DuPont unit, it closed a plant in Puerto Rico; all but a few of its nearly 300 workers were laid off.
Arsenio Muñiz Rosado, a 51-year-old father who had spent 23 years at the plant, starting out as a groundskeeper, sank into a debilitating depression. Still jobless six months after he was let go, he tried to commit suicide with a bottle full of Xanax pills. It was the first of several attempts.
For all intents and purposes, he said of the plant, “I died in there.”
Cindy Hewitt, a human resources manager, had been instructed to persuade about a dozen of Mr. Rosado’s co-workers to move to Miami, where Dade had another plant.
Not long after the workers arrived, the company said it would close that factory, too. Ms. Hewitt tried to help several workers return to Puerto Rico, but she said Dade insisted that they first repay thousands of dollars of moving costs. “They were treated horribly,” she said. “There was absolutely no concern for the employees. It was truly and completely profit-focused.”
Ms. Hewitt said she was so disillusioned by the experience that she left the corporate world.
Executives involved in the decisions said that to make Dade a success, they had combined companies in need of overhaul. And the mergers created redundant work forces that had to be winnowed.
“It’s not done because they love cutting jobs,” said Mark Wolsey-Paige, a former senior vice president at Dade. “It ultimately made those companies stronger.”
He added: “Something even worse would have happened if they had remained as they were before Bain bought them. It would have been a steady stream of cuts and layoffs.”
By 1998, Mr. Romney and his restless colleagues at Bain began looking for a way to cash out of the firm’s investment in Dade.
A hefty offer arrived. Kohlberg Kravis Roberts & Company, a rival buyout firm, proposed buying Dade Behring for $1.9 billion, according to documents filed in the bankruptcy case. But Bain executives rejected it, disappointed by the price, the documents indicate.
Bain settled on a common tactic in private equity: In April 1999, it pushed Dade to borrow hundreds of millions of dollars to buy half of Bain’s shares in the company-- and half of those of its investment partners.
Bain pocketed the $242 million. Goldman received $121 million. Top Dade executives got $55 million, records show. The total payout to shareholders reached $420 million-- nearly as much as the purchase price for Dade.
The money was hard to resist, acknowledged Mr. Brightfelt, the former Dade president. “We were all glad to get some cash out,” he said, “and we thought we deserved it.”
A few months before the payout, in February 1999, Mr. Romney retired from Bain Capital to oversee the Olympic Games in Salt Lake City. He nevertheless benefited from the transaction, a financial disclosure form indicates. It shows that until at least 2001, he owned 16.5 percent of the Bain Capital partnership responsible for the Dade investment.
Even as the investors prospered, Dade cut 367 more jobs in 1999, documents filed with the Securities and Exchange Commission show.
The strategy of sharply increasing Dade’s debt alarmed several executives. Mr. Garrett, the former chief executive of Dade who stood to gain from the transaction, said he had argued unsuccessfully against it.
“It was too aggressive,” Mr. Garrett said. “It was done right up to the limit of what the company could borrow.”
With the amount of money that Dade owed to creditors and vendors at nearly $2 billion, some executives worried that the company would have little maneuvering room if its financial situation suddenly deteriorated.
Soon enough, it did. Interest rates rose, increasing Dade’s debt payments. The value of the euro, then a new currency, slid, reducing Dade’s European revenue. And a new distribution center had unexpected delays.
Creditors, unsettled by deteriorating finances and high debts, began to pounce. More layoffs followed. And in August of 2002, Dade filed for bankruptcy protection.
The creditors threatened litigation against Bain and its investment partners, accusing them of “professional negligence” and “unjust enrichment,” according to bankruptcy documents. Bain and the other investors argued that the claims were baseless, but agreed to forgo about $68 million owed to them by Dade. And seven years after buying the company, Bain forfeited its remaining ownership stake.
And in Romney world, corporations, after all, are people too.