An out-of-context view of Romney’s time at Bain Capital
By Glenn Kessler,
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“To me, Mitt Romney takes from poor, the middle class, and gives to the rich. It is the opposite of Robin Hood.”
— worker in latest Obama campaign ad
Mitt Romney’s role at Bain Capital continues to be a major issue in this presidential election, as the Obama campaign rolls out video after video about the travails of individual workers who suffered at companies owned by Bain.
The latest video, about a company called Ampad, must bring back bad memories for Romney because in 1994 he seemed on the verge of defeating the late Ted Kennedy in a bitter Senate race when striking Ampad workers showed up in Massachusetts and started showing up in Kennedy attack ads. The Ampad story turned the tide against Romney and Kennedy won.
The Obama ads are very slick, and we find them frustrating to fact check. Unlike some of the ads produced by Romney’s GOP rivals — such as the notorious “King of Bain” video produced by supporters of Newt Gingrich — the facts mentioned in the ads are generally correct. But then those facts are intercut with highly personal attacks on Romney by the workers themselves, such as the statement featured above.
We can’t fact check those statements, since they are personal sentiments. (Some of the lines are almost too perfect, which makes us wonder.) So that leaves us in the uncomfortable position of validating the facts in a highly negative attack.
So we are going to try a different tack: a guide for readers on how to evaluate claims about Romney and Bain Capital. We will use this particular deal as an example.
1. What was Romney’s involvement?
Romney was the chief executive of Bain Capital, which essentially started out as a venture capitalist (providing seed money for companies such as Staples) and then moved into the more lucrative realm of private equity. In private equity, Bain would take direct ownership of the company, often with current management, in a deal largely financed by debt.
In the case of Ampad, described in a UPI article at the time as having “earned of small profit in 1991,” Bain bought it in 1992 from Mead Corp., which was trying to cut costs at the time, with the intention of combining it with other paper firms. Bain invested $5 million, but the bulk of the purchase was financed by a $35 million loan.
Here’s how Mergers & Acquisitions Report described the deal under the headline, “Bain Capital Kicks Off Office Products Consolidation Play.”
Bain Capital is targeting sales growth for Ampad of 15%-25% a year, roughly 50% of which will be accomplished through acquisitions, [Bain executive Marc] Wolpow said. The acquisitions could range in size from a $10-15 million purchase of a single product line to an acquisition two to three times the size of Ampad, Wolpow said.
The idea is to capitalize on the shift that is currently occurring in distribution of office supplies, he added. "With the advent of Staples and Office Warehouse, we've seen a dislocation of small distributors," Wolpow explained. "Large distributors are consolidating as we move toward a more efficient distribution of office products."
Bain Capital runs three equity funds with a total of $200 million in capital. The combined portfolio of the funds includes 40 companies. "We are trying to identify companies where value can be created through increased operating earnings, either by improving operations or increasing revenues," Wolpow explained.
Note the last part of Wolpow’s comment — “improving operations” means greater efficiencies, which can mean fewer jobs.
Romney never served on the board of Ampad (later renamed American Pad and Paper). Instead, other Bain executives such as Wolpow did. Romney was running Bain at the time the strategy was launched, though he later took off time for the Senate race and left Bain for good in 1999. Romney was regarded as a hands-on manager, but he was in charge of the whole enterprise – some 40 companies.
2. Why did the workers lose their jobs?
One of the plants purchased by Ampad was in Marion, Ind., which had once been owned by Smith Corona. Literally on the day of the takeover, workers were all told they had lost their jobs but could reapply, often at lower wages and poorer health-care benefits. Bain was trying to make this company more efficient, and did so in a brutal fashion.
The transaction took place in July, 1994, when Romney was running for the Senate seat. He first claimed he was not involved in the transaction, but Wolpow was quoted in 2002 as saying that as chief executive, Romney was responsible for decisions made by Bain employees.
To maximize profits at Ampad, Wolpow told the Boston Globe, “we implemented an aggressive plant closing and cost-cutting program.”
“Mitt’s employees executed that transaction. We carried out the business plan. He was CEO of the firm,” Wolpow said. “I reported directly to Mitt Romney ... You can’t be CEO of Bain Capital and say, ‘I really don't know what my guys were doing.’ ”
Wolpow, who left Bain in 1999 when Romney left to help run the Olympics, now runs a private equity firm, Audax Group. He declined to comment on the Ampad transaction this week.
The workers in Marion went on strike and Ampad eventually shut down the plant. Charles Hanson, Ampad’s president, said the Dallas-based firm “regretted” its decision but said it was necessary because the company “has sustained severe economic damage as a result of our inability to manufacture products at our Marion plant,” according to a Boston Globe account.
3. What was Bain’s return on investment?
The Ampad deal turned out to be very lucrative for Bain Capital. Out of that $5 million investment, the firm earned $107 million, according to a Bain prospectus obtained last year by the Los Angeles Times.
The Boston Globe also tracked the deal in a fascinating graphic, showing both Bain’s gains and the company’s increasing debt load. The biggest payday for Bain was when the company sold shares to the public in 1996, which allowed Bain to sell some of its shares and reap about $45 million. (It still owned about one-third of the company even after the public offering.) Bain, year after year, also earned large fees for providing advice — and even for arranging the public offering of shares.
But the debt load was too much for the company, especially as it came under price pressure by companies such as Staples (another Bain company), and it quickly fell into bankruptcy just a few years later.
4. What’s the context of this particular deal?
The overall record of Bain Capital is a pretty good one, at least for investors. The Wall Street Journal found that Bain under Romney produced about $2.5 billion in gains for investors in 77 deals, on about $1.1 billion invested. But about 22 percent of the companies either filed for bankruptcy or liquidated by the end of the eighth year after Bain invested. “Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court,” the Wall Street Journal said.
The Ampad deal certainly looks like it turned out bad for the workers and very good for Bain. But that is the nature of the private equity business.
As Howard Anderson, a senior lecturer at the Massachusetts Institute of Technology’s Entrepreneurship Center told The Washington Post: “Private equity is a little like sex. When it’s good, it’s very, very good. When it’s bad, it’s still pretty good.”
The big question, for us at least, is whether the story of one company — or a few — in some of Bain’s bad deals should negate a largely positive record of building businesses, sometimes in challenging economic climates. Moreover, as we noted in our fact check of the last Obama video, it is not entirely clear if some of these particular plants would have survived in any case — or as long — without Bain’s investment. One cannot look at each individual case in a vacuum, ignoring broad economic trends or competition that had made these jobs already vulnerable.
The Pinocchio Test
As we said at the beginning, the Obama campaign ad depicts the facts fairly straight. But we going to award a Pinocchio because this particular story of these unfortunate workers is taken out of context from Bain’s overall record. It’s also not entirely clear how much Romney was responsible for the decision to treat the workers in this manner, but he was the chief executive, so he certainly has the ultimate responsibility. The Ampad transaction, until its final days, also largely tracks with Romney’s active leadership of Bain, making it fair game for scrutiny of his record as a business executive.
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