Companies’ Ills Did Not Harm Romney’s FirmNo, it's not unusual at all. In fact, it was very nearly standard practice for Bain to engineer deals that ensured that Bain got paid even as companies it bought foundered. What's more, it seems to have been standard practice to set those companies to foundering in order to make sure that Bain got paid.
By MICHAEL LUO and JULIE CRESWELL
Cambridge Industries, an automotive plastics supplier whose losses had been building for three consecutive years, finally filed for bankruptcy in May 2000 under a mountain of debt that had ballooned to more than $300 million.
Yet Bain Capital, the private equity firm that controlled the Michigan-based company, continued to religiously collect its $950,000-a-year “advisory fee” in quarterly installments, even to the very end, according to court documents.
In all, Bain garnered more than $10 million in fees from Cambridge over five years, including a $2.25 million payment just for buying the company, according to bankruptcy records and filings with the Securities and Exchange Commission. Meanwhile, Bain’s investors saw their $16 million investment in Cambridge wiped out.
That Bain was able to reap revenue from Cambridge, even as it foundered, was hardly unusual.
What sets the Cambridge example apart, though, is that it appears to be an example of Bain making sure it got paid even as its investors were wiped out. That ain't good business practice! Unless, of course, your business is taking care of Number One. Still, this is surely an unusual example, even for Bain. You have to be able to give your potential investors a pretty good shot at actually making money most of the time in order to be able to stay in the private equity business, or any business for that matter. So this kind of total cluster#*&@ can't happen all the time.
As I think has been amply demonstrated already, for Bain and its investors to have profited handsomely while the companies it acquired went down the crapper was pretty near standard practice. Bain chose its targets carefully (as even the Romney camp is only too eager to remind us). Left unsaid, though, was that Romney's voracious appetite for business intelligence was aimed at helping him sniff out companies worth raiding. That is, middling companies that had done things like maintained healthy credit lines or cash reserves so that they could actually grow and create jobs when the time was right, and kept their employee pension funds fully capitalized. Those were the juicy targets, because they'd forgone risky expansions and giant executive paydays in order to shore up their companies, and if Bain could take control of them, they could not only drain those credit lines, cash reserves and pension funds, but use the cash to both expand recklessly and pay their executives the gluttonous bonuses by which "business success" is measured these days. Bain Capital was not about turning around failing companies. It was about eating the seed corn of cautious mid-level performers, while cutting their labor and production-related expenses to the bone to make them look "efficient," so that they could be flipped for sale.
Along the way, Bain used the leverage gained by taking over the boards of these companies to declare and pay special dividends to itself, which they could pass on Bain investors to keep them happy. And when cash ran short, Bain directors could order the companies to borrow against the value of the company itself, again handing the cash over to Bain. It all worked out very well for Bain and its investors.
All the while, though, Bain was double-dipping. In addition to the special dividends, bonuses paid to themselves with company cash, and the like, Bain's directors also routinely voted to force the newly acquired companies to pay Bain for "managing" the takeover, and the day to day running of the company, even if where they were running it was into the ground. Again, this was standard practice for Bain, engineered right into its acquisition deals. The Times article explains:
The numerous fees collected by private equity firms have been a frequent lightning rod for the industry. First, the firms charge their investors a percentage of the fund as a management fee, meant to cover its overhead. During Mr. Romney’s tenure, this was initially 2.5 percent and then dropped to 2 percent. Private equity firms also collect transaction or deal fees, ostensibly for advisory work, from companies they buy. These fees are generally collected for major transactions, like the purchase of another company, a public stock offering or even the initial acquisition of the company. A third fee stream comes from annual monitoring or advisory fees that portfolio companies typically pay to their owners, the buyout firms.How do you like that? Some racket, huh? You borrow money from someone else in order to buy a company, then you force the company to pay you for having the genius idea of buying it. Don't you wish you could get the things you buy, like your groceries or maybe your car, to pay you for being smart enough to buy them? No wonder one-percenter cyborgs like Romney think everyone should be rich. In their world, people pay you to buy stuff! Hell, I'd have me a car elevator too, if that were the case!
But it's these fees that made it possible for Bain to make bank on Cambridge even as its investors lost their money. Bain kept collecting nearly a million dollars a year in management fees even as they "managed" the company right into bankruptcy. And although that represented just standard business practice to Bain, think about what a departure that is from real capitalism (even as the Romney camp still maintains attacking Bain equals attacking capitalism).
The reason Bain was able to engineer fat payments to itself and its investors even as the companies it bought went bankrupt and their workers were robbed of their pensions and fired is that in our economic system, it's the capital that's paramount. What we're supposed to think really makes things go isn't the labor that produces the products companies sell to get rich, but the money investors put in that makes the company possible.
It's a little bit of a chicken-and-egg story, but in our system, that's how we've come to think of things. (I'm sure it has nothing whatsoever to do with right-wing belief tanks spending so lavishly to train judges to think exactly that.) For practicing capitalists (as opposed to those of us who just live in a capitalist system), insisting that investors need to get paid before the workers do is justified by the belief that their egg is what makes chickens possible, so primacy on payday is simply the natural order of things. Try arguing with them that you need to pay the chickens who lay the eggs first, and they'll laugh in your face. (And so will their judges.)
But that's kind of what happened with Cambridge, isn't it? Bain bought the company, as it always did, with borrowed money. Money that investors gave over to Bain to do the shopping, and that they'd come to trust would, under current business law and practices, ensure that they got paid first, since capital is what makes the world go 'round. Yet when payday came and there was only so much to go 'round, the managers at Bain took their cut first, on the argument that it was their "work" that made the acquisition possible in the first place. The chickens, after all, had laid these eggs, whereas the capitalists had merely sat back and thrown money at them.
Ain't that something? So how about this? If nothing else, this should put your mind at ease that in attacking Bain, you'll no longer be attacking capitalism. You'll be attacking racketeering. Does that suit you better? I'll assume that's an offer you can't refuse.