Not exactly Bain Capital:
With so much talk and rumors flying around these days about Presidential candidate Mitt Romney and Bain Capital, I thought it might be helpful if I related a small story regarding a business project I had a few years ago.
This is not exactly a story about Bain Capital, and I am certainly not in the same league of business investors as Mitt Romney. But it may help some people to understand what the roll of a venture capital company is when it comes to acquisitions and buying businesses that are in financial straights, or in bankruptcy.
Several years ago I had an opportunity to bid on a small company that had gone under. The company had a top-of-the line product and demand for their most expensive product was good. Selling at over $265,000 each the company had cash deposits on hand for ten new units at the time they folded and declared bankruptcy. Those customer deposits were in the amounts of 10% for each purchase, ($26,000 each). In other words they had over $260,000 cash in the bank. They also had a standing inventory on hand of over $350,000.
The property rights and brand name licenses and all manufacturing tooling was valued at an estimated $3,500,000, (Three and a half Million dollars).
So why does a company with a top of the line product and a 9+ month backlog of sales go bankrupt? Mismanagement of assets and corruption at the top levels. The Finance manager and the head of the sales department had gotten greedy and lazy. The owners were being lied to and the investors had no idea of what was happening until it was too late. In addition to the internal corruption the owners had over extended the companies expansion a few years earlier and began spending thousands of dollars on amenities that only served to make the company look more successful than they really were. (A new $5,000 office desk for each of the managers does not make a company successful or rich).
By the time things had evolved to the point of the bankruptcy auction and sale of all company assets the business had an estimated market value of over $8,000,000 with obligations under one million. Potential unexplored markets were worth an estimated $8 – $10 Million annually if the sales department had only pursued those markets.
My estimates for the acquisition were that it would take just under one million to win the bid for the company and all its assets plus an additional $5 million to rebuild the business. I began looking for venture capital investors. Here’s where a company like Bain Capital would come in. Unfortunately I didn’t know that name back then, but I did have some small success in finding a few private investors that were interested. But it was not quite enough; we lost the auction bid by $25,000. That eight + million dollar business and the entire assets of the company was sold for only $925,000.
There were no jobs lost in that acquisition and sale because the company had already closed its doors, there was no one left to fire of lay-off. If I had been successful in buying the company and managed to rebuild it, we could have created 60-75-100 new jobs for our local area. Small potatoes compared to Bain Capital, but the outside suppliers would also have welcomed the additional sales revenues and the jobs that those parts would have provided. Once those new markets were explored and the additional business avenues developed the estimated business potential could have been in the neighborhood of $18-$20 million dollars. Those new markets would have created 50-75 new jobs internally and an estimated 200 jobs throughout the supporting industries. That’s in addition to the other internal jobs mentioned above.
One of the major components of the primary product made and sold by this company was being manufactured here in the US. The cost per unit to the company for that one single unfinished component was $70,000 each. So yes, we would have looked at the possibility of foreign manufacturers. Mexico and China would have been among the candidates. But that component only required 7 –10 employees to manufacture.
This my friends is what Mitt Romney and Bain Capital did to earn so much money.
There is no corruption involved in this type of business acquisition, the corruption had already occurred and is what caused the business to fail in the first place. Did anybody loose money in this bankruptcy and subsequent sale? Yes, the original investors lost everything they had invested. ( The deposits being held for the ten new sales was returned) But it was neither me nor the people who won the bid and bought the company that caused that loss. It was the corruption and greed of the two men running the sales and finance departments and the failure of the owners to detect that corruption. The venture capitalists who helped in the bankruptcy purchase acquisition are not the ones who participated or engaged in the corruption.
You’ve heard that it takes money to make money. In this case it would have taken $926,000 to buy the company and another $5 - $8 million to rebuild it. But then it also takes a lot of hard work by a dedicated team of knowledgeable professionals to rebuild and create a successful business out of the ruins of a failed bankruptcy pile of rubble.
Mitt Romney and Bain Capital have an 80+ percent success rate at buying and rebuilding businesses not unlike this example.
RPM
Replies
A side note to this story is that one of the competitors in the bidding was a Chicago firm. When they heard that the $260,000 in customer deposits had been returned their comment was "That was a really stupid F___kin move, why in hell did they do that".
My answer to him was simply "Ethics", to which he replied "screw that".
I guess that competitors comment says it all about our culture now. Integrity and ethics refunded those deposits. Great piece. Thank you.. Jay K.
I heard something similar from a verture captialist that was asked how he felt about business ethics. He said they were two different and unrelated topics. Obviously gunslingers like him are part of the problem.
Maybe your experience was on a smaller scale, but informative non-the-less.
Thanks.
Excellent article from someone who has had experience with failing companies.
The Obama campaign has made a heyday out of misinformation on what exactly venture capitalists do, and the general public knows little about the subject.
Of course, Romney's great success in this activity has made him a really easy target for those who advocate redistribution of wealth. So our socialist enemies' modus operandi is to emphasize supposed victims of Bain in order to subtly attack Romney's wealth and thereby discredit him and capitalism. Many people don't even know anything nefarious is going on, let alone begin to know what it really is.
Now Mitt Romney can re-build America, back to our success.
There are many lessons to be learned from an article such as this if one is inclined to take the time and effort.
One thing is that neither capitalism nor Socialism or Communism can ever succeed without the moral and ethical standards required to run and operate a good business. The business depicted in the example was destroyed by greed from the two department managers. While these two individuals managed to get away with well over a half million dollars in company assets and cash, the investors, owners, and all the employees were made to suffer the consequences of their deceit. The local community lost a valuable employer, tax revenues, and income base from the workers. But greed and corruption is never limited to unethical employees or managers. Greed and corruption exists at all levels of business and Government. The Chicago style lack of ethics and honorable standards displayed by the bidder in my side note above is not unusual, but sadly has become the norm in today’s society. The Democrats and politicians from both sides of the isle have this great vision of some kind of utopian world where everyone works together for the good of the whole. A utopian world where everyone works hard and everyone shares the wealth of the combined labors of the whole collective.
That vision only sounds good on paper, but in reality it can never work. It can never succeed for the same reasons this business in my example failed, greed, and selfishness.
But greed like most things in life is actually a double-edged sword. Seldom thought of in the sense of a good thing, greed is actually what drives our personal incentive. It is that personal incentive and the desire to have a better life that drives us to create things. That is “the Pursuit of Happiness” described in our Constitution. If used (and governed) properly greed and incentives can create a far better world, and much closer to that utopian dream, than any other form of system ever devised by man. But only if man is free to create that better world. Driven by personal greed and incentives, but also self-governed and tempered with ethics and morality.
Many people have said that you cannot legislate morality. That is true. But we don’t need to, that is the value of religion. And the Christian faith and teachings happens to be the best example of those standards, ethics, and beliefs.
When our business and government leaders lack those religious beliefs, then they also lack the moral and ethical standards necessary to allow men to be free. They lack the moral standards required to govern a free society. They are left with only greed and corruption.
Very well said. Thank you,
Ronald... Excellent commentary and as you said it doesn't matter what *****ISM is the favored *****ISM, greed and corruption will tear into its core and then spread to others that lack ethics and have the opportunity to do so, leaving ecomomic disaster in their wake. The economy lives and dies with the middle class and they are the ones with little or no power to fix it when it breaks. We just have to suck it up.
Chainsaw Al Dunlap and others like him created this new style of CEO. Once most CEO's were owners and risk was commensurate with reward. Many of the gunslinger CEO's today really have very little skin in the game. Where is the risk when compensation includes not only a healthy salary, but stock options, signing bonuses, other perks, and yet performance in many cases is entirely ignored. Bob Nardelli is the perfect example of obscene compensation (around $200-million out the door of Home Depot) with shamefully poor performance.
Charlie Wilson, CEO of GM, was the highest paid CEO in 1950. He took home $626,300.00 / year. It would be equivalent to $5-million in today’s dollars, which is slightly anemic by today’s fortune 500 CEO compensation standards.
If you’re not the owner, then you’re an employee and employees have salary ranges. No one is against a CEO being highly compensated, but just not obscenely compensated. CEO Larry Ellison is the founder of Oracle. Ellison’s reward didn’t come without risk, as did Bob Nardelli’s pot of gold.
Finally, I won’t expand too much on back-dated stock options, but it was one more new way, starting in the 90's to lavishly compensate the new breed of CEO’s, but unfortunately at the shareholder's expense. Though this practice was corralled in 2006, there are still about 2300 cases of back-dated stock options on the books.
Mitt Romney had skin in the game at Bain Capital and didn't compromise his ethics.
Thanks for your contribution here Len, very welcomed and informative.
CEO's and venture Capitalists that are only in the game for a quick turn around, (get it and get out rich quick) are what is wrong with any form of ****ISM as you say. And unfortunately we (the little guys) have little or nothing to say about things.
But one corporate case I think that may be worth mention,,,, APPLE Computer and Steve Jobs. Not only for the products that Steve Jobs invented and produced, but more (in this discussion) about the way he and Wazniak included their list of employees into the business and made them all a part of the company. Jobs and Waz allowed the employees to benefit from the hard work and long hours that everyone contributed to that corporate success. Apple Computer may be responsible for more employee millionairs than any other company in history. And they did it without screwing anybody.
Thanks for adding to this thread.
Very interesting. Thank you!