The NYT on Romney @ Bain

Larry Ribstein —  13 November 2011

A long front page article in today’s NYT tries to make political hay out of Romney’s time at private equity firm Bain Capital.  The article supports the White House’s efforts to, as the article says, “frame Mr. Romney’s record at Bain as evidence that he would pursue slash and burn economics and that his business career thrived by enriching the elite at the expense of the working class.”

To do this, the NYT picks one transaction, medical company Dade International, from the 150 handled by Bain during Romney’s 15-year tenure (financing Staples as a startup is mentioned in passing).  The Times says the “deal shows the unintended human costs and messy financial consequences behind the brand of capitalism that Mr. Romney practiced for 15 years.”  The Times summarizes the transaction as follows:

At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. And in waves of layoffs, it cut loose 1,700 workers in the United States, including Brian and Christine Shoemaker, who lost their jobs at a plant in Westwood, Mass. Staggered, Mr. Shoemaker wondered, “How can the bean counters just come in here and say, Hey, it’s over?”

Apart from the question of whether the Dade transaction was typical, what does the Times show about the Dade transaction?  Let’s review the facts in the NYT story.

In 1994, Bain led a buyout group in purchasing the Dade, which the Times describes as “ailing” and “rife with problems,” from Baxter International. 

Romney himself was “quite knowledgeable about the business” according to Dade’s then CEO. The article describes how Bain imposed the discipline on Dade that was a key innovation of the private equity industry. I summarize the incentive mechanisms that private equity employed here and in Chapter 8 of Rise of the Uncorporation. The Times article suggests this is how Bain operated in running Dade:

Dade employees could always tell when Bain Capital executives were in town: their bosses worked longer hours. “The thing Bain brought was urgency,” Mr. Brightfelt [a former Dade president] said. “It was 24 hours a day. It never stopped.” At Dade’s headquarters, the men from Bain — young, nattily dressed Bostonians — exerted themselves in ways big and small as the new owners. They took a majority of seats on the board of directors. They interviewed candidates for high-level jobs. They negotiated crucial contracts with suppliers. And they requested reams of data.

This clearly wasn’t a slash-and-run takeover.  Bain expanded Dade rather than just firing the workers and selling out for a profit, based on Romney’s desire to “double down on Dade.” As a result, the company

became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers. The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast — Dade’s long-term liabilities, which surged to $816 million from $298 million.

So what’s the problem?  While the article wants to make a lot of the overleveraging of Dade, during Romney’s tenure debt apparently increased in line with assets. The firm also cut some salaries.  But the article doesn’t discuss aggregate salary data, just the reduction of one particular employee’s salary, and the replacement of his “generous pension plan” by a 401(k) — a common practice in industry at this time. 

The biggest horror story in the article was layoffs in a plant owned by one of Dade’s acquisitions.  Although the story focuses on one worker’s personal tragedy, a former Dade SVP is quoted as saying, “It’s not done because they love cutting jobs. It ultimately made those companies stronger.” If layoffs and salary cuts make the business stronger, workers as a whole can benefit even as some suffer.  The owners hurt themselves if they make the business weaker by depreciating the labor force. 

The article concludes with a discussion of a transaction that occurred in April, 1999, two months after Romney retired from Bain, in which “it pushed Dade to borrow hundreds of millions of dollars to buy half of Bain’s shares in the company — and half of those of its investment partners.” Romney evidently benefited from this transaction via an increase in the value of his 16.5% interest in Bain.  We are not told whether he had any role in approving in the increased debt.

We learn that Dade cut more jobs in 1999, evidently after Romney had left.    Three years after Romney’s departure, when Romney no longer had a financial interest in Bain, and after other events weakened Dade (increased interest rates, declining euro, delays in constructing a new distribution center), Dade filed for bankruptcy.  But Dade left bankruptcy two months later and went public. In 2007 it was sold to Siemens for $7 billion — 15.5 times the price paid in 1994 for an “ailing” orphaned division of a big corporation.  The article concludes with the suggestion that the “painful” layoffs “ultimately worked.”

In short, the story’s details don’t support its slant.  Romney’s “brand of capitalism” seems to have worked in this instance, even if its success was colored by events that occurred after he left Bain.  Although I’m not suggesting that Romney should or would run the country the way he ran Bain and Dade, I’m also not troubled by his history as a deeply invested owner and manager of Bain.  True, he and the other “elites” at his firm made a lot of money. But if every deal was like Dade, it’s not clear society as a whole, including the working class, came out worse. 

I understand what the OWS crowd will make of this story.  But they need to persuade me why this story should make Romney look worse than the typical presidential candidate who has spent his life in politics and whose job history has consisted mainly of engineering wealth transfers from weak interest groups (e.g., taxpayers) to more powerful ones (e.g., big banks).

Larry Ribstein

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Professor of Law, University of Illinois College of Law

4 responses to The NYT on Romney @ Bain

  1. 

    I agree with your last paragraph. I would love to see the media approach a story unbiased and then analyze it based on what they find. This one is a typical case of “I need to prove that Romney was a poor business leader, irrespective of what I find.” These kinds of things confuse the heck out of the voter and promote lies in politics.

  2. 

    The White House Operatives have determined, not unreasonably, that Romney will be the Republican nominee. They have tasked the NYTimes with softening up the enemy by shelling him in places they deem vulnerable. The NYTimes always eager to please the DNC, has complied. Expect a lot more of this during the next 12 months.

Trackbacks and Pingbacks:

  1. Krugman on private equity « Truth on the Market - December 10, 2011

    [...] earlier wrote on the NYT’s previous attempt to make political hay out of Romney’s business career.  [...]

  2. Is Mitt Romney’s business experience really a plus? (The Week) | Breaking News Today - November 14, 2011

    [...] works: The Times is trying to “make political hay” out of Romney’s time at Bain, says Larry Ribstein at Truth on the Market. But the newspaper’s case study doesn’t prove much. Dade is just one [...]