I finally read the New York Times article Newt keeps recommending. Actually it’s a Reuters article. I am not an expert in this area in the least. But here are some general impressions drawn from the piece, which seems fair and is not quite the damning portrayal of the “looting” of a company as advertised. That doesn’t mean it’s a great picture, either. It will strike a lot of people as grossly unfair that Bain failed to run this steel company, G. S. Industries, successfully, yet still made money. A few key points from the piece.
It was a risky proposition from the beginning:
Soon after, in October 1993, Bain Capital, co-founded by Mitt Romney, became majority shareholder in a steel mill that had been operating since 1888.
It was a gamble. The old mill, renamed GS Technologies, needed expensive updating, and demand for its products was susceptible to cycles in the mining industry and commodities markets. . . .
Some analysts say Bain should not be blamed for the company’s failure, noting that a wave of cheap imports forced nearly half of the U.S. steel industry into bankruptcy during that period. Another company set up around the same time, in which Bain took a minority stake, Steel Dynamics in Fort Wayne, Indiana, thrived.
“GS and Steel Dynamics were about as different as it gets,” industry analyst Michelle Applebaum said. GS’s core products were vulnerable to competition while Steel Dynamics became “one of the country’s lowest-cost manufacturers of steel sheet,” a product with more staying power. Steel Dynamics was also a non-union shop.
Bain invested and got an immediate pay-off:
Nevertheless, Bain and its partners decided to buy the mill for $75 million. Bain put up about $8 million to gain majority control of the company, renamed GS Technologies Inc. GE Capital, former Armco executives [Armco was the former owner] and Leggett & Platt, a major customer for the mill’s wire rods, chipped in the rest of the equity. . . .
Bain got its money back quickly. The new company issued $125 million in bonds and paid Bain a $36.1 million dividend in 1994.
“Paying distributions with debt is not uncommon,” said Campbell Harvey, a finance professor at Duke University. “The only thing that strikes me as a bit unusual is the size of the dividend. There would be logic in them saving some cash for a downturn.”
Looking back on the dividend payout, [ Armco manager Jack] Stutz and another former GS Technologies officer, Mario Concha, believe it weakened the mill’s financial position.
“At the time they paid that dividend, they felt that the financials justified it,” Stutz said.
This made Bain a winner at the end of the day:
Overall, Bain made at least $12 million on the steel company it created by merging the Kansas City mill with another in South Carolina before the new entity declared bankruptcy in 2001. Bain also collected an additional $900,000 a year through 1999 for management consulting services, public filings show.
But Bain was trying to grow the company:
In 1995 Bain merged GS with another wire rod maker in Georgetown, South Carolina, to form one of the largest mini-mill steel producers in the U.S. The new company issued another $125 million in bonds to pay for the merger. Bain doubled down, reinvesting $16.5 million of its earlier dividend.
The new company, dubbed GS Industries Inc., would have annual revenues of $1 billion and employ 3,800 people.
The company was buffeted by tensions with its union:
In 1997, with Armco’s pension guarantees set to expire in one year, the United Steelworkers local at the Kansas City plant was worried that GS was not setting aside enough money to cover pension obligations and other benefits in the event of a shutdown.
David Foster, the negotiator for the union, said labor talks were typically more tense at companies owned by private equity firms because the high level of debt left managers with less flexibility.
Contract talks foundered and the union went on strike in April 1997. The first standoff since 1959 quickly turned nasty. Workers shot bottle rockets at security guards, tossed nails in the roadways to flatten the tires of nonunion trucks and pounded on the windows of vehicles as they left the plant.
After 10 weeks, the two sides reached a deal that boosted pensions and ensured that workers would get health and life insurance in the event of a shutdown.
The company was run poorly:
Paperwork proliferated. Cost-cutting efforts backfired. Managers skimped on purchases of everything from earplugs to spare motors and scaled back routine maintenance. Machines began to break down more often, and with parts no longer in stock a replacement could take days to arrive.
Labor costs spiked as managers revamped work schedules with little understanding of how the plant actually operated.
It got hammered by foreign competition:
Meanwhile, a wave of cheap imports from Asia drove steel prices down sharply, while costs for natural gas and electricity rose. The Asian financial crisis lowered demand for mined metals, which hit the company’s grinding-ball business.
The company’s failure had a number of possible causes:
Charles Bradford, an analyst at Bradford Research, blames the union, in part, for the failure of GS Industries to survive in the new global marketplace.
“If you look at the steel companies that went under at the time, all of them were unionized,” he said. “I’m not saying this was the only factor — these firms faced other headwinds such as cheap labor and a strong dollar … but the unions held them back.”
Union officials blame the Bain managers for saddling the company with too much debt for a capital-intensive, cyclical industry such as steel.
The upshot is that the company went bust. The workers were laid off and didn’t get the pensions they were promised. The U.S Pension Benefit Guaranty Corp. had to cover the company’s basic pension costs. The stories of the struggles of the former workers related at the end of the piece are truly heart-rending. They felt the impact of the failure much more acutely than anyone at Bain. But this wasn’t “vulture capitalism.” Bain wanted GS to succeed and failed to pull it off.
Exactly! Thank you, Rich. It is truly shocking how many supposed conservatives in recent days seem to utterly fail to grasp that direct equity investment in distressed companies and entrepreneurial startups is actually RISKY.
In the new Gingrich-Perry-Huntsman style of free enterprise, you're only allowed to invest your own money if you prop up mismanaged, uncompetitive, failing companies, keep useless facilities open, sport unneeded workers to lifetime job security, and I guess, screw yourself, bondholders and other primary creditors so you can keep funding pensions that should never have been promised.
Oh, wait! We've seen that sort of capitalism somewhere already...at GM and Chrysler.
Reply to this commentLinkReport AbuseJohn, surely you know that arguing against the obvious vulture capitalism of Bain Capital is NOT equal to endorsing the crony capitalism of the left vis a vis GM and Chrysler?
Reply to this commentLinkReport AbuseAnd, apparently this is the only defense of Bain's record that Romney has been able to offer so far: "Well, it was no different from what Obama did with GM." Brilliant!
Reply to this commentLinkReport AbuseLooks pretty much like vulture capitalism to me (and I have in my time run a private equity portfolio.) The difference is the creative use of leverage. Bain wanted the company to succeed, but scooping out is original investment plus a profit through a dividend and then letting it fall apart, to be picked up partly by the taxpayer through the PBGC was a good second best. Vulturing wasn't their first choice, but it added to their returns and made a good supplementary strategy.
The problem's the leverage, and that is the fault ultimately of Messrs Greenspan and Bernanke. But I think the tackier side of private equity is tough to defend against Obama, and that makes Romney a very weak nominee, with little chance of prevailing in November.
Reply to this commentLinkReport AbuseIn any deal businesses try to protect the downside. It sounds like the GS buyout was structured so that worst case Bain made a little and best case they would have made a ton. Obviously they would have preferred the latter but weren't able to make it happen. I don't know how it will play in the election, but it seems like a far cry from deliberate looting.
Reply to this commentLinkReport Abuse"I don't know how it will play in the election, ... "
If Obama's campaign people are competent you do know how it will play. Badly for Mitt.
Reply to this commentLinkReport AbuseI'm taking some time from my 11 minutes in the private sector to comment:
Bain = Greedy Wall Street to most Americans. You can write article after article but nobody is reading them. This will Not sell.
Oh and now your guy just equated his work at Bain with the Obama takeover/bailout of GM.
So now we have to defend Romneycare, Bain and bailouts with Romney as our nominee.
And Perry is the stupid one?
Reply to this commentLinkReport AbuseGood grief, OF COURSE it was vulture capitalism! I'm more conservative than anyone I read on these blogs, but I refuse to call "chicken sh#t", "chicken salad". You can't just WILL AWAY reality and call yourself an intellectually honest conservative. Romney's company wasn't illegal, immoral, unuseful or fattening. It IS designed to win in either case. Bain either will win slightly or win massively. As demonstrated in the article, they got their capital back quickly by loading the company down in debt (the bond issue). Would they have wanted to win MORE by the company actually succeeding? Of course! But, if you have a heads I win, tails you lose situation, that's pretty much the definition of "vulture capitalism". It's a scenario where the subject company has few if any options and therefore accepts terms from the "vulture firm" that they would normally NEVER accept. You know, terms like, we get an immediate, exorbitant management fee, we get first position in all debt, we get an extraordinarily high rate of interest, we get effective control of the board. Let's not continue to make ourselves look as intellectually dishonest as the Dems by defending this VERY niche specialty of finance. Mitt Romney quite simply was NOT an entrepreneur in the normal sense, he was a "sub-prime debt specialist", (to use a different term for it)
Reply to this commentLinkReport AbuseAs you say, GS had few options. Presumably if they had a better option than Bain Capital they would have taken it. And if Bain couldn't structure the deal to protect their downside they would have passed and spent their time and money on better opportunities. (If they'd known how it was going to turn out they probably would have passed even on the deal as it existed - in seven years they could have made a lot more money somewhere else.)
Reply to this commentLinkReport AbuseIt's not pretty, but GS wasn't in a pretty situation and I wouldn't expect any private equity firm to operate as a charitable organization helping those who need the most help rather than those where they can make a profit.
A number of steel companies failed because the onerous union contracts particularly pension obligations made them uncompetitive. But after going through bankruptcy, their assets were bought by new owners who were able to operate them profitably without the load of those union packages. That inflames liberals and union types who view jobs with high wages and benefits as a human right, but when they make companies uncompetitive they are self-destructive.
American workers, like it or not, compete with those in other countries and generally as consumers benefit from free trade, which means that they must be competitive just as their employers must be. If employers are truly overreaching, unions have a legitimate role, but they shouldn't be driving the company into bankruptcy. When they do, bankruptcy is the solution.
Those investing in the company who try to make it profitable aren't vultures. If an investor takes over and immediately shut it down and sell off the assets, the vulture label might apply, but I don't think that's the Bain way.
Reply to this commentLinkReport AbuseThe steel company was poorly managed under Bain. They did not make operations more efficient, they simply cut costs, often in ways that madeit impossible for the company to work efficiently. They allowed it to go bankrupt, then took tax dollars to pay off some obligations whil sticking bondholders with others. bain walked away with a big payoff although the company failed under their management. That isn't taking a risk. In fact, for Bain, it was a sure thing. but it was bad for America.
Reply to this commentLinkReport Abuserwingnut is correct.
In addition it looks as though the company failed in part due to poor management. If Romney couldn't run a steel plant why would we want him to be in charge of an entire economy?
The only consistent conservative in the race is Perry.
Reply to this commentLinkReport AbuseWhich is exactly why he was hit with every cheap shot - including 'from the left' by Romney - from the moment he announced. Would that he was a better debater early on and didn't utter a couple boneheaded retorts, but I will not pick my candidate based on debates or marginal quips alone.
Reply to this commentLinkReport Abuse...I have always been uncomfortable with the taking someone to the cleaners...I have always pd a fair price or done better for someone in trouble...and I find it repungnant that the GOP would promote that kind of bussiness...I seriously intend to go Independant if this cut throat attitude continues to be advocated as "capitolism"...on "FAUX"...Vulture capitolism is not something I want to defend to my friends or anyone else...sincere x-Rep...by the way
Reply to this commentLinkReport AbuseRomney's tax returns could be tied up because his Swiss bank accounts as well as Bains are under investigation...if I found this you know the media is covering it up...the STINK is getting bigger...
...for those of you working at/as Angel Investors, companies involved with mergers and acquisitions.
Okay so Romney is at Bain Capital. Bain capitalizes struggling companies that are about to go under, companies that either lost their market share, have bad management, or whatever. Changes need to be made but before anything happens, someone needs to step in, cut a check, and keep the lights on. Bain does this I assume by buying/seizing/stealing the company for 30/40/50/60/whatever cents on the dollar.
How is what Romney and Bain is doing to/for companies any different than when I walk into Wells Fargo branch, look at a sheet of paper listing all their near-by foreclosed property, offering 50 cents on the dollar to buy one of these pieces of real estate, and the bank agrees, thereby ridding itself of a "toxic asset?" Is that not also "Vulture" Capitalism? If it is, is what I have done immoral? If it isn't immoral then why is what Bain did immoral?
"Vulture" capitalism exists everywhere. A man dies and his children are stuck with a 38 foot Diesel pusher RV. Gramps paid $98,000 for it and I step in and offer his kids $35,000 so they don't have to insure it and pay taxes on it. Vulture? A couple is getting divorced and they have a couple weeks of timeshare they need to dump. They spent $10,000 on each week and I step in and offer $7,500 cash if they give both weeks to me. Vulture? Is this immoral? You get a $85,000 boat at an auction for $17,500. Immoral?
Reply to this commentLinkReport Abuse"A man dies and his children are stuck with a 38 foot Diesel pusher RV. Gramps paid $98,000 for it and I step in and offer his kids $35,000 so they don't have to insure it and pay taxes on it. Vulture?"
Depends. If the reasonable market value is, say, $65K, you're a vulture.
Reply to this commentLinkReport AbuseThat's a bizarre idea, indicative of a fundamental misunderstanding of the merits of capitalism.
Must every transaction be conducted at a "reasonable" price? Who should be the arbiter of this "reasonableness?" The entire idea of a free market system is predicated upon the natural convergence of pricing to reflect the broader consensus as opposed to some arbitrary determination of reasonableness.
But the RV analogy isn't the best one - because in this case, we have to operate under the assumption that all transacting parties are relatively expert business people.
The "vulture" assertion implies that the deals being done involve little in the way of productive improvement - that they're just laying on leverage. Ultimately the banks are culpable for participating, but if we're making a larger "economic impact" argument, it's really not possible for a PE firm like Bain to consistently overlever its investments if it intends to continue to do more deals and extract more fees. There's a natural mechanism keeping them oriented toward doing "good things" with the companies they buy. And the aversion to leverage isn't always legitimate - the truth is that many companies, especially small ones that end up being targets for LBO shops, have grossly inefficient capital structures and SHOULD carry more leverage than they do.
There are some transactions that stand out as over-levered sham deals. But the "vulture" argument requires that to be more than a paltry minority - and that claim strains credulity.
Reply to this commentLinkReport AbuseGood article about Romney and what he needs to do to explain his work at Bain. Honestly,
Reply to this commentLinkReport Abuseclearly, and forthrightly. This particular article can be found in the WSJ. Forgive us if we had some more private investors and money desiring to turn around GM and Chrysler for example. Oh, that would be vulture -capitalism and worse yet anti-union. Yet, we will be deemed for the working class if we pour millions of tax dollars into saving said floundering, dying company. And we say we want real conservatives. Good grief.
I propose some new rules for all writers at NR/NRO to address the perennial issue we have of political reporters spending 10 minutes on Wikipedia when a hot new issue pops up and waxing poetic as if they have always been experts on the issue:
1) If you can't tell me the fee structure of a private equity firm, you don't get to talk about private equity.
2) If you can't tell me how a PE fund or deal is legally structured, you don't get to talk about private equity.
3) If you can't tell me the difference between senior debt or mezzanine financing, you don't get to talk about private equity.
4) If you can't tell me the difference between common equity and mandatory convertible preferred, you don't get to talk about private equity.
5) If you can't tell me the difference between AUM, carry, and management fees, you don't get to talk about private equity.
6) If you can't discuss the difference between increasing free cash flow or expanding multiples for the purpose of an LBO exit, you don't get to talk about private equity.
7) If your name is Ramesh Ponnuru and you don't understand that PE firms get between 15% and 20% of a fund's committed capital in AUM fees over the life of a fund regardless of how you perform, you don't get to talk about private equity.
Thanks.
Reply to this commentLinkReport AbuseI agree entirely. People in the US are feeling angry and screwed over. Some of what Bain did was fine, but some of what it did was criminal pump and dump, and much of it was raw predatory destruction. The real question is, do we want this guy as our presidential candidate when we have three or four successful governors or senators with fine records, who have a record of conservative accomplishments?
Reply to this commentLinkReport Abuse