Mitt Romney, Debt, and
what America needs
Martin G. Evans
818 words
It is not difficult to understand the far right wing
Republican's distaste for Mitt Romney. Even though former Vice-President Dick
Cheney told us that deficits id not matter, the right wing has been screaming
for the past three years that deficits did mater.. Their opposition to
previously uncontroversial legislation to the raising of the the US debt
limited was a warning that the party took debt seriously.
How then could they support a man who has made his whole
career in management in the leveraged buyout business? The word “leveraged'
gives the clue to what this business is all about: buying a firm with money belonging
to someone else. Using that debt to improve the operations of the firm and to
acquire additional firms where there might be synergy, paying management fees
and dividends, and depending on the success in these endeavors, either selling
the firm off, or allowing it to fall into bankruptcy where the losers would be
the debt holders, not the instigators of the leveraged buyout.
In either case the instigators did well – either through fees
and the money they received when the company was sold or just through the fees
if the company failed. Romney was a star in this business at Bain Capital. He
could analyze a company's operations and finances, he could clearly see where
there was success and where there was slack. He could negotiate the appropriate
level of debt for company operations and for ensuring that Bain Capital
received its due reward.
What Romney and the leveraged buyout business did was good
for for Bain and its investors. It is less clear whether this activity
benefited the economy as a whole. It is
incredibly difficult to get data on the impact of the leveraged buyout
business. The firms are very secretive. Nevertheless, writing in the New York
Times on January 25th., 2011, Steven Davidoff summarized the limited
research on the impact of private equity and leveraged buyouts on firm
outcomes. The picture is mixed:
•
Private equity firms were equally likely to file
for bankruptcy as similar firms with the same level of debt.
•
But Private equity firms might have had more
debt than necessary to fund their operations in order to pay dividends and fees
to their owners
•
However a second study suggested that the size
of these payments was unrelated to a firm's financial distress
•
Private equity firms were less likely to default
than other firms.
•
Private equity firms shrank payroll by about 6%
but this was little different from what other firms did in similar
circumstances.
•
Private equity firms were good at developing new
lines of business
•
Private equity firms invested more efficiently
because of the new owners access to cheaper capital.
•
The performance of private equity firms was
closely monitored by the new owners
•
Two thirds of private equity firms replaced the
top managers within four years of being bought, suggesting that there was an
opportunity, taken by the new owners,
for better management of the operations.
If these results hold for Bain Capital (and we do not know
whether they do), the conclusion is that in doing well for Bain Capital, Romney
inflicted minimal downside on the economy as a whole; though his activities at
Bain Capital could be devastating for the individual managers and employees who
lost their jobs.
One wonders whether he fought as hard for the survival of the
troubled firms held by Bain Capital as he did when he returned to his former
company, Bain & Company, the consulting firm. He was brought back from Bain
Capital to head up Bain and Company which was in dire distress due to excessive
debt after its earnings fell.
He convinced the partners that they had extracted too much in dividends and
fees out of the company and forced them to pay back a considerable fraction of
what they had extracted which was used to pay down the debt and convince
bankers to give Bain more time to service the debt.
The question is why didn't he exhibit the same behavior when companies owned by
Bain Capital faced similar problems: excessive debt caused by transfers of
funds from the operating companies to Bain Capital?
I can see this wouldn't have been possible for all companies in the portfolio;
but surely it would have been possible for those companies making a product for
which there was demand, where operating costs were low. and where the only
problem was servicing the excessive debt.
Mr. Romney is well known for his inconsistent behavior (aka flip
flops). If he had fought as hard as he did for Bain for the companies owned by
Bain Capital he might have saved jobs,
investor capital, and lenders' capital.
Mitt Romney has made a career of increasing debt. Is he
really the person we can trust to reduce the US debt?
