ROMNEY’S RECORD AT BAIN CAPITAL

The Wall Street Journal

  • JANUARY 9, 2012

Romney at Bain: Big Gains, Some Busts

[BAIN] Associated PressMitt Romney, with his parents and wife in 1994 announcing his candidacy for a Senate seat, a race he lost.

Mitt Romney’s political foes are stepping up attacks based on his time running investment firm Bain Capital, tagging him with making a fortune from the rougher side of American capitalism—even as Mr. Romney says his Bain tenure shows he knows how to build businesses.

Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain’s involvement and shortly afterward.

Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

Another finding was that Bain produced stellar returns for its investors—yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.

Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.

A spokesman for Bain Capital said its “success rate in growing and turning around businesses in both strong and weak economic periods is very high…” The company called the Journal’s analysis “inaccurate and misleading” and said it unfairly put the onus on Bain for events at companies after it no longer owned them.

Seeking the protection of a bankruptcy court isn’t necessarily a sign of long-term business failure. Many of the Bain companies emerged from reorganization healthier, just as, for instance, General Motors did a few years ago. But while bankruptcy filings aren’t a perfect measure of performance, they provide a way to assess a disparate array of target businesses that in many cases weren’t required to make public financial filings.

The Journal’s findings could provide fodder for both critics and supporters of Mr. Romney’s presidential ambitions and of his role at Bain. Some experts, while conceding that available studies don’t provide a direct comparison, said the rate at which the firms Bain invested in ran into trouble appears to be higher than experienced by some rival buyout firms during the era.

Romney’s GOP rivals attacked the front-runner’s conservatism, strength as a candidate and business record in a final debate before New Hampshire’s primary. Patrick O’Connor has details on Campaign Journal.

That notion could undermine a central thrust of Mr. Romney’s campaign message: that his private-sector experience building companies makes him the best candidate to turn around the ailing U.S. economy.

The numbers, however, also reflect Bain’s investing style, which, particularly during the firm’s early years, was focused on smaller and sometimes troubled companies that Bain hoped to fix or build.

Bain was investing in “riskier deals,” said Steven N. Kaplan, a finance professor at the University of Chicago’s Booth School of Business. “For every one that went bankrupt, they had one that was a screaming success. The overall effect was terrific performance” for the firm’s investors.

The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.

Some of the companies that ran into trouble did so after Bain was no longer involved and new owners had taken charge. Bain declined to provide information on when its involvement in its investments ended.

The Journal chose to look at target companies’ fates by the end of the eighth year after Bain’s initial investment, which appears close to the maximum time that Bain remained in control of any of its targets. Academic research has shown that buyout firms during this era exited their deals on average after 5½ years, but in a large percentage of cases were still involved beyond seven years.

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Bain backers argue that it is unfair to tag the firm with any bankruptcy that occurred several years after it took a company public or sold it. Others have said the firm and its former leader could still bear some responsibility for failing to leave a company in strong shape.

Bain said the evaluation “uses a fundamentally flawed methodology that unfairly assigns responsibility to us for many events that occurred in companies when we did not own or control them, and disregards dozens of successful venture capital investments.”

Bain added: “We understand that our record will be scrutinized and distorted during the political campaign involving our partner who retired 12 years ago, but our focus remains on working with management teams to build great companies and improve their operations.”

If the Journal analysis were limited to bankruptcies and closures occurring by the end of the fifth year after Bain first invested, the rate would move down to 12%. That measure would exclude several cases that have brought Mr. Romney political criticism, where businesses filed for bankruptcy seven or eight years after Bain’s investment.

Mr. Romney has told potential voters how at Bain he helped launch or rebuild companies such as Staples Inc., Domino’s Pizza Inc. and Sports Authority Inc., creating more than 100,000 jobs.

His rivals have sought to turn his Bain tenure against him. Rick Perry has run an ad saying Mr. Romney “made millions buying companies and laying off workers.” Newt Gingrich has said Mr. Romney should “give back all the money he’s earned from bankrupting companies and laying off employees over his years at Bain.”

Mr. Gingrich laced into Mr. Romney at this weekend’s debates, and a group associated with the former House Speaker plans to release a 28-minute documentary blistering Mr. Romney’s Bain tenure. Meanwhile, on ABC on Sunday, Obama strategist David Axelrod criticized Mr. Romney as “a corporate raider.”

Mr. Romney describes job losses and bankruptcies as an inevitable byproduct of the capitalist system, and has said that in some cases, eliminating some jobs may save the rest of the company. In response to Mr. Gingrich, Mr. Romney said: “Doesn’t he understand how the economy works? In the real economy, some businesses succeed and some fail.”

Asked in an interview about Bain’s bankruptcy and failure rate, Mr. Romney said that in buyout deals, “our orientation was by and large to acquire businesses that were out of favor and in some cases in trouble.” He added that Bain wasn’t the type of firm that stripped companies and fired workers, but instead, “our approach was to try to build a business. We were not always successful.”

(Mr. Romney had a particularly close involvement with one firm that flamed out, a maker of children’s dolls meant to resemble their owners. Please see accompanying article.)

Bain, citing privacy reasons, declined to provide a list of the companies it invested in.

For its analysis, the Journal used a list of 77 Bain investments inked from 1984 through 1998 that were included in a document that a unit of Deutsche Bank AG circulated in 2000, while soliciting participants in a fund to invest with Bain. The document—which cites Bain as a source—appears to be the most authoritative available for Bain’s activities, and says that the deals accounted for about 90% of the money Bain invested during that period. The Journal obtained updated information from a similar 2004 prospectus.

The list focused on larger “private equity” investments—typically deals in which Bain took control of a business, or in some cases worked with another buyout firm to do so, aiming to improve the target business’s performance. Deutsche Bank lumped into a single line all of Bain’s investments of less than $2 million and those that were more of a venture-capital nature, which generally involved buying minority stakes in promising small companies such as Staples.

Seventeen of the 77 private-equity targets filed bankruptcy petitions, usually Chapter 11 reorganization, or closed their doors by the end of the eighth year after Bain’s investment.

Of these, at least five clearly were still controlled and run by Bain at the time. In three other cases, Bain was a minority investor in a deal run by another buyout firm. In some of the remaining cases, Bain still held a small stake or had just sold out when the bankruptcy filing or shutdown occurred, while in other cases the trouble struck several years after Bain’s exit.

Academic research provides some basis to compare this performance. A study of buyouts by various firms globally found a 5% to 8% bankruptcy rate among target companies that were taken over from 1985 to 1999.

However, this 2007 study, by Swedish academic Per Strömberg, followed the target companies only until the buyout firm’s exit, not until eight years after the investment as did the Journal. So companies that went public, then filed for bankruptcy a few years later, wouldn’t have been counted as bankruptcies in the study.

Another study looked at outcomes of buyout deals involving companies that were large enough to issue publicly traded debt. In deals from the early 1980s to late 1990s, roughly 15% to 20% of these target companies defaulted on bonds within seven years of the initial investment, while not necessarily filing for bankruptcy, said Hamid Mehran, who worked on the study. It was done in 2008 for the Bank for International Settlements.

Mr. Mehran, a researcher at the Federal Reserve Bank of New York, said the rate at which Bain’s target companies ran into trouble at some stage “seems large.”

He said it could be explained by the preponderance, among Bain investments, of small companies, which tend to fail at a higher rate.

Marc Wolpow, a former Bain Capital executive, said the frequency of trouble did indeed stem largely from the firm’s strategy early on of investing in smaller, troubled firms it hoped to turn around.

“I don’t think you can hold Mitt out as a great investor per se,” Mr. Wolpow said, “but he was an excellent CEO of an investment firm, and the results speak for themselves.”

Mr. Romney, previously a Bain & Co. consultant, became the first leader of Bain Capital when it was founded in 1984. He left in early 1999 to take charge of the financially faltering 2002 Salt Lake City Winter Olympics.

His Bain tenure brought him a fortune that his campaign has estimated at $190 million to $250 million.

Bain, after its initial focus on small firms needing capital, later shifted toward the potentially more lucrative business of leveraged buyouts—acquiring control of businesses by using investors’ money amplified by debt.

In such deals, a buyout firm tries to improve profitability by refocusing operations and cutting costs, a step that can include cutting the work force. Buyout firms seek to make money not only by eventually selling a business for more than they put into it, but also by extracting fees and sometimes dividends while they own it.

A few investments produced spectacular profits, the documents show. A 1995 Bain investment of $6.4 million in eye-care concern Wesley Jessen VisionCare Inc. yielded a gain of more than $300 million, roughly a 46-fold return.

But the fact that some of Bain’s biggest winners later landed in bankruptcy court “is potentially damning evidence” that the firm left the companies in vulnerable shape, said Mr. Strömberg, the Swedish academic. He said research shows that buyout companies, on average, add value to their targets, but it is worrisome if that reverses within a few years.

A potentially mitigating factor, he added, is that these bankruptcy filings tended to be clustered during the post-2000 economic downturn.

One of these deals involved DDi Corp., an Anaheim, Calif., maker of circuit boards. Bain nearly quadrupled the money its investors put into DDi starting in 1996, turning a $41 million investment into $157 million of value within a few years, according to the 2004 prospectus.

Bain merged DDi with another firm in which Bain also held a stake and took the combined company public in 2000. Bain then gradually sold most of its shares to the public or distributed them to its investors and to Bain partners. Mr. Romney personally sold $4.3 million of DDi stock from these distributions in May 2001, regulatory filings show.

But DDi’s performance deteriorated in the downturn after the tech bubble deflated. It reported a sharp drop in sales and in 2001 and 2002 cut its work force by 1,300 people, or 40%, to about 1,900 employees, regulatory filings show.

DDi defaulted on some of its debt in late 2002 at a time when Bain still controlled two of its six board seats, and filed for Chapter 11 bankruptcy reorganization in 2003. DDi later emerged from bankruptcy and continues in business today, with a work force similar in size to what it had after the layoffs.

Write to Mark Maremont at mark.maremont@wsj.com

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