Posted on 01/10/2012 9:26:42 AM PST by Zakeet
Lately, Bain founder and GOP presidential candidate Mitt Romney has found himself in a spirited defense of the private equity industry, doing all he can to spin decades of data which confirm, without failure, that PE Leveraged Buy Outs are nothing but "efficiency maximizing" transactions whose only goal is the "maximization" of EBITDA in the pursuit of dividend recap deals, IPOs or outright sales, while loading up the company with untenable amounts of leverage. All this with a 3-5 year investment horizon, which ignores the long-term viability of a company and seeks to streamline (read fire as many as possible) operations as quickly as possible in the goal of maximizing short-term returns. We wish him luck in his endeavor. As for the other side of the equation, we recreate a post we penned back in November 2009 which analyzes just how effective the mega-LBOs have been for the economy, and the workers involved. In other words - the facts. In a nutshell, here they are: "The Disastrous Performance Of Private Equity: Of The Top 10 LBOs, 6 Are In Distress, 4 Have Defaulted." Read on for the full details.
(Excerpt) Read more at zerohedge.com ...
You said the capital raised by LBO's go into the business. That is not true. The capital raised by the acquisition corp goes to the seller of the business for its equity. The seller takes the money and goes away.
The leveraged debt obligation is what goes to the company...not the capital.
Again, why should American taxpayers have to be forced to pay for Willard’s business incompetence and greed?
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Workers were denied the severance pay and health insurance they’d been promised, and their pension benefits were cut..
What’s more, a federal government insurance agency had to pony up $44 million to bail out the company’s underfunded pension plan. Nevertheless, Bain profited on the deal, receiving $12 million on its $8 million initial investment and at least $4.5 million in consulting fees.
http://legalinsurrection.com/2012/01/bain-drip-drip-drip/
If a business returns value to the shareholders, then it has performed it fiduciary responsibility. Whether or not jobs were lost or created is not material. The investors are the risk takers and are deserving of rewarding if the business improves. They're the ones who put it all on the line.
As much as I despise Myth Romney, neither he nor Bain are job killers. The labor unions are and minimum wage are at fault. They stand in opposition to individual liberty and freedom.
I really agree with you on principle. That said, I don’t have a lot of respect for the electorate of this country. If this meme goes viral (which I’m certain it will if he gets the nomination), Romney will be poison to most voters.
What I call “big capital” is vastly different from business owner’s - several million of them - who have operations that are too small to attract private equity.
Big capital has shifted over the past decade to mostly investing in businesses operating in nations other than America.
Free enterprise needs capital for form new businesses.
There is trillions of capital invested overseas which therefore not available to form new businesses here in the U.S.
“Big capital” lobbies for a “tax holiday”. What this refers to is the fact that in order to avoid paying taxes on the profits earned on their overseas investments, those entities making the investments had to inform the IRS that they did not foresee those profits being repatriated, that the capital would simply be reinvested overseas.
Now “big capital” is saying that if they have a tax holiday on those profits, they will record them on their U.S. P & L statements, bring the cash back, and they will invest that in American businesses. Trouble is, when the last holiday was declared in 2004 the investment in America did not happen; ways were found around it.
More to the point, conventional wisdom in “big capital” is that overseas investments are where all the “growth” is (they think American business operations will not yield the profits that foreign ones will). Would “big capital” suddenly do the long-term smart thing of investing in America’s economy, taking smaller profits ? Or would they look for the near-term profits as they always have and get that capital invested back overseas by whatever circuitous route necessary ?
There is one more little corner where capital is tucked away.
There is $15 trillion “invested” in U.S. Treasury bonds/notes/bills. The purported “zero-risk” investment.
Nice, eh ?
Except for one thing: there is only one place a true, real investment can ultimately be invested, and that’s in a business. Even the home we live in is not a pure investment because we need to live in a home. A second home, an investment property, that is a true investment. But what is it but a business operation ? Can I get a duh ? There is income and expenses. In truth, that is a P & L.
So “big capital” has lost it’s fascination with investing in American businesses.
Try to start a small business and go look for investors; you’ll find them asking for a lot if they even invest anything.
This is why if Romney - whose whole career has been in either “big capital” or “big government” - was elected, he would simply be a new captain of the Titanic.
One might at first think that Romney will “help one’s 401k”. But wait; equity investing in general is basing returns on profits, not on a fixed return rate. Hmmm... So if there is a significant devaluation of the dollar equity returns can keep up better than fixed returns, since businesses either raise prices and survive or they go out of business. The stock market can be resilient - no matter who is in office - even in dire economic times that cause a great deal of pain.
Instead of only looking at our 401k, perhaps we could expand a bit and think about the country we live in and how the spheres of employment, income potential and consumer prices going to fare. Now, couple that in with the 401k really winding up facing tremendous headwinds, producing low returns - and a devalued dollar devaluing our supposed “retirement nestegg” in terms of purchasing power when we’re 70, 75, 80, etc. We may just live long enough to feel some real economic pain.
If we think it through - the whole nation is experiencing a collapse brought on by a rapidly growing mountain of government debt, starving small business of equity capital, government picking winners and losers and propping up nonsense industries that provide no meaningful benefits (is GDP perhaps even overreported in addition to being anemic), increased lending to large, insolvent financial institutions (bailouts or cronyism), etc.,etc.
Romney only knows that playbook, the playbook of the ever-expanding debt bubble that is finally rearing it’s ugly head in Europe and the U.S. Romney and similar politicians still can’t bring themselves to cut 90% of their bureaucratic friend’s jobs and take the handcuffs off of small business. Romney and all those with his background talk to the likes of Goldman and the JP Morg and they never fail to convince - a la Hank Paulson - that there will be a big failure unless government “saves” the “system”. They being “the system” of course.
The only thing propping up Western economies is the continued issuance of new government debt.
Debt is not Revenue.
This is why Romney’s tactics all along have been to actually say as little as possible. Keep mouth closed. Speak in platitudes. Let the Republican machine do it’s work and elect him.
Scrutinizing Romney’s practices at Bain Capital doesn’t make one anti-capitalist.
“To reject, morally, the type of LBOs that Bain was noted for is not a rejection of Capitalism, but may be a rejection, on moral as opposed to legal terms, of what one may chose to do with Capitalism.”
You are getting on a slippery slope here.You are defining community organizer capitalism that has objectives other than pure profit if you are going to inject “morality” into the equation. Whose morality? Is there one objective form of morality.The terms greed, loot,corporate raider, LBO,vulture is subjective manipulative political imagery. Most companies are started or acquired with debt,Bain used a combination of capital and debt to acquire. There is absolutely nothing wrong with LBOs unless the acquisition is exclusively to tap the pension fund.None of Bain’s deals were to raid the pension funds but to acquire faltering companies at a distressed price with a view to restructuring them, holding them and selling them later for a profit.Or should we characterize an equity firm offering a price to but their firm as evil “corporate raiders”.One man’s profit is defined as another man’s greed. Vultures are people buying distressed properties at their fair market value which in many cases is distressed. Should they pay more than FMV to avoid the tag vulture. Should small or large investors smugly be characterized as vultures for buying properties that are distressed with a view to asking any tenants to leave so they can improve them and sell them later for a profit?
“Which is why the attacks on Romney based on Bain are so disgusting.”
I don’t like Romney, and I hope he’s doesn’t get the nomination, but I was furious about the attacks by Newt and Perry re Romney saying he “likes to fire people”. A sixth grader could hear the entire statement, in context, and know that Romney wasn’t talking about firing employees. He said it in the context of “firing” service providers (in this case, healthcare providers). He said he likes to fire people who don’t provide the services they’re supposed to.
We’ll give Perry a pass; he’s not the sharpest knife in the drawer. Even if sixth graders could understand, perhaps he couldn’t.
But Newt... he’s extremely intelligent and he knew exactly what Romney was talking about. The fact that he took this out of context to make Romney sound nefarious is a pathetic and desperate act. He absolutely knows better. I was leaning toward Newt or Santorum, but Newt is stooping pretty low and I don’t like it. I like that (so far) Santorum is staying above it all.
Good post........
Destructive to whom? To all of us who understand the importance of a market economy. These dishonest criticisms undermine support for economic freedom and play into the hands of the left.
I agree that Romney has lots of baggage, but Bain isn’t baggage. All these ads do is provide aid and comfort to the OWS goons and movement socialists. His record in MA should be enough to sink him 10 times over. That record is what he should be beaten with.
I don’t support Mittens. I don’t trust him, and he and Huntsman are the only two potential nominees that I probably wouldn’t vote for.
The best we can hope for in NH tonight is that Romney doesn’t get a big win. If the vote continues to be split, I think a lot of the Establishment Rs will begin to concede that Mittens doesn’t have enough grassroots support to be the nominee...at least I hope so.
Let me give you a little background on the Worldwide Grinding Systems purchase by Bain and others.
The Kansas City mill, called the Sheffield mill back in the old days, was run for much of the era after the 70s by Armco Steel. It was a specialized mill run with what were the best mid-20th century electrode furnaces as I understand. It made grinding procucts and specialized wire with a heavy usage of its components by the mining industry.
In the last two years before it was sold by Armco in ‘93 it lost over 700 million. Much of this was due to decline in minining and the rise is electric costs and labor costs as the furnace was a giant electrode furnace for highly specialized refining.
Against that they split it up and sold it out for about 113 million. 80 million was the mill to Bain and the other 23 million was from Legatt and Platt (specializing in mining industry work) that bought the wire pulling operations. They also had to take a 200 million write down to Armco’s books.
It was a dog. Armco sold it in a “Leveraged” Buy Out — not a all cash sale that made them whole. Bain couldn’t convert it to make it profitable and eventually sold off bits and parts to keep their investment whole for their share holders.
The destruction of the age old KC mill was createed by Armco that didn’t modernize the market offerings of the mill and didn’t modernize the mill itself and just signed union contracts to operate year to year until it was time to shut it down or sell it off to scavagers. Legatt and Platt and Bain were two scavengers that tried to pick some meat off the bones of an already dead road-kill.
Pollution regulations, an in-town location and all the like killed this mill long before the scavangers arrived, IMHO.
Take that further...should they reduce their risk, say, with the use of coercion, intimidation, insider information (which is everywhere BTW)? Should they use legal ledgerdemain?
I, for one, don't have a problem with aggressiveness when buying companies. To be successful, one must be aggressive...and there's the rub. Raiders sometimes step over the law...way over (ask Ivan Boesky). And they take actions that put others (their opponents) at a great financial disadvantage.
Some hard core "capitalists" find this business too morally ambiguous...it requires them to do things they are uncomfortable with...they find their consciences cannot stand the burden of their actions. That's why the few "dealmakers" who are successful at it are VERY successful. They are seldom guided or burdened by conscience.
And that is what America will want to know about Romney. What was his role in this career? Where did his conscience draw the line?.
Yes, and the reasons, which should be obvious for anyone who reads Durden’s piece, have been posted.
I can’t stand elitist!
All righty then they went in with a hostel take over and fired everyone is that what you want me to say??? Loan the company money buy them out either way Bain Capital was doing Capitalism and they were doing good!
I never said that Romney was a business Guru! Bain Capital filled a need and that is what Capitalism is about. Maybe these companies would have failed and maybe not with or without Bain. Romney was one of the founders and his record might have been ok maybe not. I am not a Romney supporter. I am a Newt supporter and Newt should not have said that just to gain points and neither should any other candidate!
He will never beat Obama with this kind of background. Romney is the poster boy of Obama's class war.
Obama and Axelrod will mop the floor with him.
None of the 240 acquisitions Bain made were “hostile” takeovers. In most cases, no one wanted the companies because they were faltering and Bain was the only bidder with the intent of restructuring, building them up and selling them. In some cases they were risky startups like Staples with one store which Bain actually grew to 2000 stores nationally.Bain lost money on most of them because that is the nature of the the risky turnaround game. Many losses along the way with big massive winners that create the bulk of your profits.Gordon Gekko imagery overdramatized by Oliver Stone in that cheesy movie has now been imbedded on the American psyche for all time that venture capitalists are all evil looking to throw folks out of their jobs and eat their young.
Perfectly describes the formula that has made a few people very rich and a lot of people very unemployed. The bastards that serially inflated and sold one company I was with from VC group to VC group over the course of a number of years were country bumpkin versions of Slicked Back Mitt, but they did all bank $ millions in their personal accounts. It doesn’t take a genius, just a significant lack of conscience.
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