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Monday, January 30, 2012

Romney at Bain Capital

MetroWest OpEd

No longer on website.

Here it is

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?


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