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10 comments

1 shutdown  Mon, May 14, 2012 5:24:46am

I am not a big fan of attacks on the Bain Capital record. In general, equity firms are a last chance for shaky companies to make a go of it. Jobs are often lost, and the company, if it survives, might be highly leveraged. But rarely, if ever, do investment firms take over a successful company for the sole purpose of dismantling it. A company that is worth more in liquidation than as an ongoing concern is a “dead man walking”, and all its jobs are in jeopardy. Subjectively viewed, it’s ugly, painful, and not always successful. Objectively, it is analogous to radical and experimental surgery in an attempt to save a dying patient - even if it succeeds, the outcome is not necessarily permanent, or pretty.

2 CuriousLurker  Mon, May 14, 2012 6:55:30am

re: #1 Ascher

From an article I read last week (emphasis mine):

…In his 2004 autobiography, Turnaround, Romney put it more bluntly: “I never actually ran one of our investments; that was left to management.” He explained that his strategy was to “invest in these underperforming companies, using the equivalent of a mortgage to leverage up our investment. Then we would go to work to help management make their business more successful.”

Romney’s phrase, “leverage up,” provides the key to understanding this most profitable stage of his business career. While putting relatively little money on the table, Bain could strike a deal using largely debt. That generally meant that the company being acquired had to borrow huge sums. But there was no guarantee that target companies would be able to repay their debts. At Bain, the goal was to buy businesses that were stagnating as subsidiaries of large corporations and grow them or shake them up to burnish their performance. Because many of the companies were troubled, or at least were going to be heavily indebted after Bain bought them, their bonds would be considered lower-grade, or “junk.” That meant they would have to pay higher interest on the bonds, like a strapped credit-card holder facing a higher rate than a person who pays off purchases more quickly. High-yielding junk bonds were appealing to investors willing to take on risk in exchange for big payouts. But they also represented a big bet: if the companies didn’t generate large profits or could not sell their stock to the public, some would be crippled by the debt layered on them by the buyout firms. […]

I have no problem with companies making a profit fair & square, but this leveraged buyout stuff strikes me as…predatory, borderline unethical. Maybe it’s just me and my bleeding heart liberal dislike of the…avaricious nature of some forms of business & finance. It doesn’t even seem like business, it seems more like loan sharking or pawnbroking, taking advantage of people/organizations that are in trouble.

I readily admit that I dislike the corporate arena and don’t really understand well how things work, but still…it just seems wrong.

3 shutdown  Mon, May 14, 2012 7:08:07am

I agree with your qualification of LBOs as predatory; I would add that the primary motivator for any turnaround firm or “vulture” fund is pure, distilled, unmitigated greed. Gearing (or leveraging) a company’s balance sheet enables an investor to increase its potential returns while distributing risk to “other people’s money”. But in the final analysis, generally an investor does better when a company survives than when it fails. Healthy companies are rarely pushed purposefully towards liquidation (reorganization and poorly planned repositioning? Certainly - but rarely are companies willfully destroyed) But creating (or sustaining) a meme whereby these investors are by definition destroyers of jobs is politically motivated misdirection.

4 CuriousLurker  Mon, May 14, 2012 7:23:44am

re: #3 Ascher

But creating (or sustaining) a meme whereby these investors are by definition destroyers of jobs is politically motivated misdirection.

Okay, I see your point clearly now.

That said, politically motivated misdirection? Say it isn’t so! I’m sure if President Obama’s campaign starts playing nice, the other side will surely follow, right? // ;)

5 Romantic Heretic  Mon, May 14, 2012 8:37:19am

re: #3 Ascher

If that’s the case these companies are in desperate need of a good PR firm. If the meme of companies like Bain is that they are parasitic it would be wise to counter it.

6 shutdown  Mon, May 14, 2012 8:50:47am

re: #5 Romantic Heretic

If that’s the case these companies are in desperate need of a good PR firm. If the meme of companies like Bain is that they are parasitic it would be wise to counter it.

I am not defending Bain. I am pointing out the gamesmanship of mis-characterizing the nature of these firms’ activities. I am certain that the folks at Bain who make management and investment decisions are motivated by profit, and profit alone. But they are no more “job destroyers” than the management of Eastman Kodak, which has reduced its workforce in the Rochester, NY area by over 90% over the past 30 years (5,000 job of 60,000 local jobs remain). Despite this horrendous record, the CEO of Kodak was named to President Obama’s Jobs Council. If Kodak fails to emerge form bankruptcy, most of the remaining 5,000 jobs will similarly be lost. Is that a better scenario than if KKR took over the company and fired 2,000 people and was able to structure a successor company that kept 3,000 positions plus additional debt?

BTW, I am also not attacking the Obama campaign and defending Romney. I just think that Democratic political nonsense deserves equal time in being pilloried.

7 alinuxguru  Mon, May 14, 2012 12:42:52pm

re: #6 Ascher

But they are no more “job destroyers” than the management of Eastman Kodak, which has reduced its workforce in the Rochester, NY area by over 90% over the past 30 years (5,000 job of 60,000 local jobs remain).

The fundamental difference between Kodak and companies acquired by Bain is that Kodak attempted to remain solvent and in business. Bain burdens an organization with debt, extracting out cash and assets in exchange.

8 shutdown  Mon, May 14, 2012 1:59:03pm

re: #7 alinuxguru

The fundamental difference between Kodak and companies acquired by Bain is that Kodak attempted to remain solvent and in business. Bain burdens an organization with debt, extracting out cash and assets in exchange.

That certainly happens, mostly as a by-product of the endeavour as a whole - it is also not the best way to run an equity buyout firm. The successful firms are the ones with portfolios of healthy companies. Outcomes where companies are shuttered are deplorable.

As to the difference between Kodak and some of Bain’s projects - I am pretty sure the tens of thousands of unemployed left in the wake of foolhardy mismanagement don’t give a rat’s hat how they came to be out of a career.

9 alinuxguru  Mon, May 14, 2012 4:10:18pm

re: #8 Ascher

That certainly happens, mostly as a by-product of the endeavour as a whole - it is also not the best way to run an equity buyout firm. The successful firms are the ones with portfolios of healthy companies. Outcomes where companies are shuttered are deplorable.

That is where we agree to disagree. The LBO is not the by-product of the endeavour as a whole, it is the whole. This isthe defacto method of Bain’s equity buyout firm.

10 shutdown  Mon, May 14, 2012 7:06:23pm

Any firm which is worth more in liquidation than as an ongoing concern is doomed. Any buyout firm which liquidates viable companies is foolish. You can dislike vulture funds, but they are not destroying anything that was going to survive. It is ugly, it is painful, it is awful for employees. But as in the Kodak example, non-viable, mismanaged companies die and the employees go begging. Don’t blame death on the carrion eaters.


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