Blog on the Run: Reloaded

Tuesday, July 17, 2012 8:06 pm

We already know what Mitt Romney’s problems are. Now let’s talk about Bain Capital’s.

Filed under: I want my money back. — Lex @ 8:06 pm
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It is a truism that the duty of a corporation’s directors is to maximize shareholder value. However, different directors and corporations and, yes, takeover artists and “turnaround specialists” define that duty in different ways. To offer an example that is simple bordering on crude, does that mean maximize next quarter’s dividend, or does that mean maximize earnings over the long haul while remaining financially healthy and competitive? Because, although they need not, these two definitions often clash.

And because they do, “turnaround specialist” can be someone who actually does return a troubled company to financial health — or someone who wrecks a company’s long-term stability for the sake of short-term profit, which may or may not actually go to shareholders, or to all shareholders in proportion to their holdings.

Guest poster Bernard Finel at Balloon Juice explains:

“Troubled” companies have a particular meaning on Wall Street. Sure, sometimes they refer to companies that are just muddled, have over-expanded, and are badly managed. But more often, what they are talking about is companies that do not seem to providing a large enough return to shareholders—a stagnating stock price in particular. But that does not mean a company is “troubled.” It can be quite profitable, have productive and loyal employees, have satisfied customers, and cash on hand.

What players like Bain do is enforce a Wall Street preference. There is a bias against companies that seek a “quiet life.” They are shunned by institutional investors, which depresses stock prices and makes these companies “troubled” in the first place. It isn’t that they are not profitable, but rather than institutional investors don’t like them, and as a result they trade at dramatically lower P/E ratios. Indeed, it isn’t even clear that takeover targets do have weaker stock performance if you lookat total returns, including dividends.

Once a company goes public, it is essentially subject to “disciplinary” takeovers if it fails to act in accordance with financial sector preferences. This is often phrased as “poorly performing managers,” but what does that really mean? That is really just about enforcing a certain conventional wisdom about what a company ought to do. But these preferences are socially problematic. Consider some of the things that seem to contribute to being a takeover target: slow growth, stable revenues, cash on hand rather than debt, generous employee compensation, conservatively-funded pension or insurance plans. (Again caveats abound. There is no simply model of predicting takeover targets.)

So, in a sense, Bain, and other buyout specialists, serve to enforce a particular type of corporate behavior that focus on expansion at the expense of predictability, risk acceptance in terms of contractual obligations to employees, and a ruthless focus on cost controls at the expense of employee loyalty and stability.

As a practical matter, it is not clear that this sort of approach is conducive to more rapid economic growth. Certainly the rise of this consensus and expansion of “disciplinary” takeovers since the 1980s has not resulted in any noticeable improvement in U.S. macroeconomic performance. And furthermore, the evidence on whether takeover targets overperform or underperform after being bought is mixed.

But what has happened is that as firms accept these practices, they become more dependent on the financial sector. They borrow more, become more active in raising money through equity sales, they run leaner by hedging through derivatives, and so on. In each case, they pay a cut to financial firms. The result has been that the financial sector’s share of corporate profits has risen dramaticallysince the 1980s.

Some of these companies will now be more successful, but many that move toward debt-fueled expansion will crash and burn. The financial sector wins either way. But it isn’t clear to me that corporate America in general win, and certainly workers whose pensions gets looted, and unions busted, and ride the boom and bust cycles of overtime and layoff do quite poorly.

I’m sure this is something of a problem with privately held companies as well. But the publicly traded ones are out there where everyone can see them. The example with which I’m most familiar is the newspaper industry. During the latter half of the 20th century, most privately held U.S. papers were bought by publicly traded chains (e.g., Gannett, Knight Ridder, Media General, Tribune, etc.). The cash from selling stock was useful for expansion, but it was a devil’s bargain: With it came short-term bottom line pressure. Perhaps the best example was Eugene Roberts, who took over as executive editor of Knight Ridder’s  money-losing Philadelphia Inquirer in 1972 and led it to both profitability and excellence in local, national and global journalism, including 17 Pulitzer Prizes in 18 years. Roberts was forced out in 1990 for  resisting budget cuts. At the time, the paper’s profit margin was around 8 percent — low for newspapers in that local-monopoly, pre-Internet era but a margin a lot of businesses would kill for, then and now.

I am not going to argue, particularly in light of Knight Ridder’s ultimate fate, that the Inquirer would be healthier today with Roberts at the helm. But I will argue that the biggest flaw in this scenario is not Roberts or the Inquirer or Knight Ridder management or even the whole newspaper industry’s lethal slowness to understand what the Internet was going to do to it. No, the biggest flaw, one merely illustrated by Romney’s exploits at Bain Capital, is that our current ethos of governance for publicly traded companies in any industry doesn’t just make it somewhere between difficult and impossible for even creative companies to survive long-term (which the odds are against in any business regardless of governance). In fact, that ethos, in many cases, is functionally indistinguishable from putting a loaded gun to your head and pulling the trigger. People call it “vulture capitalism,” but that’s an insult to vultures, which typically neither attack healthy animals nor redefine “healthy” to justify their predatory scavenging.

UPDATE: Just today, economist Dean Baker makes a related and very important point: Running a private-equity firm is much more about profiting from tax dodges than it is about making companies more efficient.

5 Comments »

  1. There are at least 12 reasons why Mitt Romney would not make a good president. Here’s John F. Ince’s list. What’s yours?

    1 • Romney neither understands nor represents most Americans. The man lacks empathy for those who have not had all the benefits he has had in life. His presidency would be deeply polarizing. One can easily image his election as president would generate new waves of social unrest and violence. He clearly represents the 1% and the 99% will not tolerate policies that exacerbate the growing divisions between rich and poor.

    2 • Romney’s job creation claims are inflated and unrealistic. Mitt Romney’s professional career was based on a very specific task: buying and selling companies for profit. He wants people to think that this qualifies him to be a job creator. With the exception of his investment in Staples and a few other early venture capital deals, his jobs creation claims are mostly chimera. He takes credit for creating jobs, when he was only an investor in those companies, not an executive. In practice, he predominantly used his power as an investor to eliminate jobs and shift other jobs overseas, all in the interest of making profits.

    3 • Romney does not have a sound fiscal plan. Extrapolating from the projections Romney has offered for increased defense spending and tax cuts, his policies would blow a hole in the Federal budget, further eroding investors faith in the government’s ability to get its fiscal house in order.

    4 • Romney has little respect for the natural environment, nor a commitment to protect and preserve it for future generations. He blindly subscribes to Republican views that climate change is not scientifically proven. He gives no indication of any desire to develop alternative sources of energy that can mitigate the man made sources of pollutants. Instead he supports the rollback of environmental regulations all but giving companies a green light to pollute the environment and waste vital natural resources.

    5 • Romney has lived a cloistered and privileged life and today has a very narrow view of the world. From the Cranbrook School to Brigham Young University, to Harvard Business School to Bain Capital, it’s difficult to imagine anyone who has been less exposed to the lives and conditions under which most Americans live. The covenants of his Mormon faith are extremely rigid, restrictive and unrealistic. His devotion to his faith is admirable, but his inability to step beyond the confines of that religion suggest that he would have difficulty reconciling who he is with who others are in an increasingly diverse world.

    6 • Romney’s worldview is rooted in intolerance. He has a very narrow view of the world. America today is a diverse nation with many different racial groups, faiths, all in need of respect. The bully incident at his prep school and his aggressive corporate behavior buying and selling companies at Bain Capital suggest someone who has little desire help those who are different, less fortunate and in weaker position than him.

    7 • Romney does not fully understand the transformative power of technological change. Mitt has no professional technical training. Most of the companies he invested in at Bain were low tech. His expertise is finance: specifically buying and selling companies. All this suggests someone who will pay lip service to the tech sector, but won’t fully grasp the potential for transforming the economy and culture through advancing technology.

    8 • Romney is temperamentally unfit for the presidency. He is peevish, controlling and less than transparent. He has a rigid worldview that revolves around what is best for himself and a small circle of those who support him.

    9 • Romney lacks direct foreign policy experience. His four years as Governor of Massachusetts do not give him sufficient knowledge or expertise to effectively deal with an increasingly complex world. On the job learners nearly always make blunders, sometimes blunders so large that they create huge problems for the U. S..

    10 • Romney lacks integrity and honesty. His fudging of issues is a sign that he feels he can head fake his way though difficult debates. His statement that he does not remember the prep school bully incident is implausible. His evasiveness over release of tax forms and embellishment of his accomplishments are all red flags. His decisions as an executive at Bain Capital were not rooted in ethical behavior. The man is simply not forthright enough to earn the trust of the American people.

    11 • Romney has no commitment to women or equal rights. There is little in his public statements or record to suggest he feels any responsibility for advancing the interests of women and minorities.

    12 • Romney lacks sufficient charisma and personality to be a strong leader. The country needs someone to lead forcefully and inspire citizens to tackle problems that threaten the diminishment of American stature on the world stage. Romney’s robotic and reptilian personality fails to connect, leaving people feeling that Romney is in the game only for himself, rather than in it for the good of all.

    Note: The author, John F. Ince of this article is a former classmate of Mitt Romney at Harvard Business School and former reporter at Fortune Magazine. He is the author of Mitt Romney: King of Bain and the Man Who Wants To Be President.

    Comment by Ajay Jain — Monday, August 6, 2012 8:47 pm @ 8:47 pm | Reply

  2. Here are the top 10 comments about Bain from Romney’s Republican rivals:

    1. “The idea that you’ve got private equity companies that come in and take companies apart so they can make profits and have people lose their jobs, that’s not what the Republican Party’s about.” — Rick Perry [New York Times, 1/12/12]

    2. “The Bain model is to go in at a very low price, borrow an immense amount of money, pay Bain an immense amount of money and leave. I’ll let you decide if that’s really good capitalism. I think that’s exploitation.” — Newt Gingrich [New York Times, 1/17/12]

    3. “Instead of trying to work with them to try to find a way to keep the jobs and to get them back on their feet, it’s all about how much money can we make, how quick can we make it, and then get out of town and find the next carcass to feed upon” — Rick Perry [National Journal, 1/10/12]

    4. “We find it pretty hard to justify rich people figuring out clever legal ways to loot a company, leaving behind 1,700 families without a job.” — Newt Gingrich [Globe and Mail, 1/9/12]

    5. “Now, I have no doubt Mitt Romney was worried about pink slips — whether he was going to have enough of them to hand out because his company, Bain Capital, of all the jobs that they killed” — Rick Perry [New York Times, 1/9/12]

    6) “He claims he created 100,000 jobs. The Washington Post, two days ago, reported in their fact check column that he gets three Pinocchios. Now, a Pinocchio is what you get from The Post if you’re not telling the truth.” — Newt Gingrich [1/13/12, NBC News]

    7. “There is something inherently wrong when getting rich off failure and sticking it to someone else is how you do your business, and I happen to think that’s indefensible” — Rick Perry [National Journal, 1/10/12]

    8. “If Governor Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years, then I would be glad to then listen to him” — Newt Gingrich [Mediaite, 12/14/11]

    9. “If you’re a victim of Bain Capital’s downsizing, it’s the ultimate insult for Mitt Romney to come to South Carolina and tell you he feels your pain, because he caused it.” — Rick Perry [New York Times, 1/8/12]

    10. “They’re vultures that sitting out there on the tree limb waiting for the company to get sick and then they swoop in, they eat the carcass. They leave with that and they leave the skeleton” — Rick Perry [National Journal, 1/10/12]

    Just last night, Newt Gingrich defended his attacks, saying “I think there are things you can legitimately look at in Bain Capital. I think there are things you can legitimately look at in anybody’s record, including Mitt Romney’s record.”

    Comment by Ajay Jain — Monday, August 6, 2012 8:48 pm @ 8:48 pm | Reply

  3. “Given the precedent set by past seven Presidents and Presidential candidates of releasing multi-year tax returns why is Romney making an exception?” Because he has a lot to hide, apparently.

    He’s the only one that knows what’s in there, and apparently he’s made the judgement that he’s better off having us suspect the worst, rather than us knowing whats in there, which apparently in his mind is worse than anything we’re likely to imagine.

    Possibilities include:

    (1) He ended up with 120 million in his 401K by the trick of agreeing with Bain to grossly undervalue the market value of his stock, then a few years later have the stock get unvalued to the stratosphere.

    (2) He participated in the tax avoidance amnesty program of a few years back, avoiding major tax penalties or prosecution.

    (3) Any one or more of the other borderline legal but very bad smelling tax dodges– “in-kind” trades, “no-risk” trades, no-risk write-offs, the list is almost endless.

    And BTW he HASNT even released all of his 2010 return, he very conveniently left off the foreign investments and deposits form. Very convenient.

    And his argument that it would be “bothersome” to collect the tax data is a crock too– he supposedly collected 23 years of the stuff to show to McCain in 2008.
    Ajay Jain===================================================================================

    Republicans betrayed their own conscience when they went against established Republican principles like the MANDATE over healthcare which was a Heritage foundation issue popularized by Gingrich.

    Obama did more than his share to UNITE but the Republicans were out to oppose for opposing sake and not following any policy or principles. In the famous words of Minority Senate Leader Mitch McConnell the Republicans were out to defeat the Obama agenda even if it went against established Republican policies set by past precedent.

    Mitch McConnell was out to make sure that President Obama remains a one term President and see where it has brought the Congress and its public esteem.

    Gingrich out of his own admission was out to defeat Obama from the day he was sworn in as President.

    You can not justify the Republicans as the “loyal” opposition as is the case in most mature democracies. They have been out to get President Obama by hook or by crook. A leader can meet the opposition half way but can not fold completely to their whims and fantasies like that of the current Tea Party affiliates.

    Republicans will loose in 2012 just like they did in 2008 but with a smaller margin because of the dark money of Billionaires due to Citizens United verdict of the right wing Supreme Court.

    ======================================================================================

    ” … Mitt Romney senior adviser Ed Gillespie said Sunday on CNN’s “State of the Union” the GOP candidate “retroactively” retired from Bain Capital after the 2002 Salt Lake City Olympics began. … ”

    No body who has been drawing at LEAST $100,000.00 per year from 1999 to 2002 from Bain Capital “retroactively” retires from Bain Capital AFTER the 2002!!! Then why draw the salary of at LEAST $100,000.00 per year from 1999 to 2002 from Bain Capital if Romney retired from Bain “retroactively” !!!

    ” … Gillespie continued, “He took a leave of absence and, in fact, Candy, he ended up not going back at all and retired retroactively to February of 1999 as a result.” … ”

    However SEC documents show Mitt Romney as sole owner of all shares of Bain Capital. Romney is also shown as CEO, President and Chairman of Board of Bain Capital in 2001 and 2002 then LEGALLY speaking Mitt Romney has been responsible to all that goes on under the banner of Bain Capital. Then to run for Governor of MA Romney sought residency of MA by lieu of his Bain positions. Now either Romney was at the Olympics OR he was at BAIN.

    Only one can be true not BOTH at the same time simultaneously!!! Will the true Willard Mitt Romney stand up and accept ONE thing? Does Romney want to accept untrue SEC filings and be called a Felon or agree that he represented Bain from 1999 to 2002?

    Comment by Ajay Jain — Monday, August 6, 2012 8:48 pm @ 8:48 pm | Reply

  4. On Friday the 13th (7/13/2012) the very illusive Mitt Romney gave very defensive interviews to all FIVE networks on a single day at once!! Just a few days ago Mitt Romney said to FOX News that explaining means that you are WEAK. So his five interviews “explaining” his time at Bain were signs of his weakness!!

    Presidential Candidate Mr. Mitt Romney maybe feeling the heat on his role in BAIN Capital, his business experience which was supposed to be his sole criteria for creating jobs and his greatest qualification for running for the American Presidency in the current economy in 2012!

    However SEC documents show Mitt Romney as sole owner of all shares of Bain Capital. Romney is shown as CEO, President and Chairman of Board of Bain Capital in 2001 and 2002 then LEGALLY speaking Mitt Romney has been responsible to all that goes on under the banner of Bain Capital.

    Mitt Romney can not just share the good like job creation from 1999 to 2002 and leave the ugly like Bankruptcies and layoffs behind as if he had nothing to do about them from 1999 to 2002.

    If he really wanted to disassociate himself from Bain Capital he could have resigned and sold all his shares in Bain Capital in February 1999 then it would have been a different matter but to share in the glory of Bain’s job creation accept a salary of $100,000 or MORE (where are the Tax Returns?) for three years and only to refuse to take the responsibility of Bankruptcies and layoffs on his WATCH (1999-2002) is trying to have it both ways and then complaining of playing politics having been caught with his hand in the proverbial Cookie Jar that is the very essence of an ACTIVE LEGAL ROLE in Bain Capital till 2002!! Was Romney getting $100,000.00 or more to do NOTHING for BAIN Capital???

    Mitt Romney will have to face the consequences of this leaving Bain “lie” that Mitt Romney has brought on upon himself. If we keep reminding the Romney campaign of the Bain exit lie and Romney’s ill effects on workers robbing them of their hard earned salaries and life long benefits all the way to November then 7/13/2012 (FRIDAY the 13th) will go down as the turning point of the 2012 Presidential election!

    Comment by Ajay Jain — Monday, August 6, 2012 8:49 pm @ 8:49 pm | Reply

  5. Two-Faced Willard

    “I was not responsible for what happened at Bain Capital” – Mitt Romney
    “I was the Sole shareholder, Sole director, Chief executive officer and President of Bain” – Mitt Romney

    “The Arizona immigration policy is a good model” – Mitt Romney
    “I didn’t really support the Arizona immigration policy” – Mitt Romney

    “The Massachusetts healthcare plan should be a model for the nation” – Mitt Romney
    “Healthcare reform should be left to the states” – Mitt Romney

    “Let Detroit go bankrupt” -Mitt Romney
    “I’ll take a lot of credit for saving the auto industry” -Mitt Romney

    “I believe Roe v Wade has gone too far.” – Mitt Romney
    “Roe v Wade has been the law for 20 years we should sustain and support it.” – Mitt Romney

    “I respect and will protect a woman’s right to choose.” – Mitt Romney
    “I never really called myself pro-choice.” – Mitt Romney

    “It was not my desire to go off and serve in Vietnam.” – Mitt Romney
    “I longed in many respects to actually be in Vietnam and represent our country there.” – Mitt Romney

    “I’m not trying to return to Reagan-Bush.” – Mitt Romney
    “Ronald Reagan is… my hero.” – Mitt Romney

    “I think the minimum wage ought to keep pace with inflation.” – Mitt Romney
    “There’s no question raising the minimum wage excessively causes a loss of jobs.” – Mitt Romney

    “I saw my father march with Martin Luther King.” – Mitt Romney
    “I did not see it with my own eyes.” – Mitt Romney

    “I would like to have campaign spending limits.” – Mitt Romney
    “The American people should be free to advocate for their candidates without burdensome limitations.” – Mitt Romney

    “I supported the assault weapon ban.” – Mitt Romney
    “I don’t support any gun control legislation.” – Mitt Romney

    Comment by Ajay Jain — Monday, August 6, 2012 8:50 pm @ 8:50 pm | Reply


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