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Bain often couldn’t lose with buyouts

Globe staff/file 1990

At Bain Capital, the firm he founded with William Bain Jr. (right), Mitt Romney spent more time focusing on leveraged buyouts than on venture capital deals.

Mitt Romney has long called himself a venture capitalist, experience he says helps him understand the economy better than other candidates for president. But he spent much more of his career in leveraged buyouts than in the investments in start-up companies known as venture capital.

Romney’s one true venture deal was Staples Inc., the office supply superstore, two years after he started Bain Capital. He wasn’t the first to discover Staples; another Boston venture firm introduced him to Staples founder Tom Stemberg. But Romney did lead the deal in 1986 in classic fashion - at first investing $650,000 in the start-up, then becoming its chief cheerleader and assisting with strategy to expand the seller of paperclips and pens.

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Bain Capital would invest about $2.5 million in Staples and, after taking the company public in 1989, made $13 million on the deal. Romney stayed on the board for many years, leaving in 2001 to run for governor of Massachusetts. Staples had 1,100 employees when it went public; today it has about 89,000.

While this may be Romney’s ideal company to talk about on the campaign trail - and it alone gets him close to the 100,000 jobs he claims to have helped create - it does not define how he spent most of his time running Bain Capital.

With leveraged buyouts, the investment firm purchases a mature company, partially with its money and with debt it transfers to the company. The new owners then usually streamline the business and seek to resell it.

For example, in the same year that Romney invested in Staples, he led the firm in its $200 million acquisition of Accuride, a wheel rim maker that was part of Firestone. Bain put down only $5 million and borrowed the rest, using junk bonds from Drexel Burnham Lambert. Eighteen months later, Bain resold the company and reaped $121 million in its first taste of the big time in the go-go 1980s.

Soon after, Romney steered Bain Capital more toward debt-driven buyouts. There was more money at stake and less risk for Bain than betting on untested technology.

Buyout firms ‘have figured out a way to make money even if the company loses money.’

Howard Anderson Sloan School of Management
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Venture capital is “absolutely more risky’’ than buyouts, said Howard Anderson, a venture investor and former entrepreneur who teaches at the Sloan School of Management at the Massachusetts Institute of Technology. For one, he said, buyouts often involve companies that have been in business for a long time. Second, buyout firms tend to take profits out of deals quickly, even having the target companies take on enormous loans to pay the investors back.

“These guys have figured out a way to make money even if the company loses money,’’ Anderson said. “It’s heads we win, tails we win. Not always - but they can do that.’’

Romney and his former partners at Bain Capital have said they make the most money by growing companies, not shrinking them. But they often make money no matter what.

Take a giant deal like Domino’s Pizza Inc. Bain led the $1.1 billion deal in 1998, putting down about $385 million in cash. The rest of the money was borrowed. Then, as Bain wanted to get its money out over the years, it had Domino’s borrow more to pay it back. Bain reaped a 500 percent return. Domino’s has $1.5 billion in debt on its books.

Romney has been criticized for doing deals at Bain Capital where the firm made money but employees were laid off and the company was left with large debt loads, and sometimes bankruptcy.

In a 1994 deal to acquire Dade International, an Illinois medical equipment company, Bain invested $27 million and made roughly eight times its money. But it also loaded up the company with $1.6 billion in debt; 1,700 people would lose their jobs, and the company briefly filed for bankruptcy protection in 2002.

Bain counters that Dade emerged from bankruptcy stronger and growing; it was acquired by Siemens for $7 billion in 2007.

Beth Healy can be reached at bhealy@globe.com.
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