[FoRK] Bain Drain
Stephen D. Williams
sdw at lig.net
Sun Sep 2 03:38:38 PDT 2012
Bain & Co. started out as a venture capital firm, being a me-too investor in Staples for instance. Then it veered into leveraged
buyouts (LBO) of companies, creating Bain Capital by a leveraging owner's equity out of Bain & Co. Irony one is that this shortly
put Bain & Co. in trouble as business dropped off and the debt was too much to cover. Irony two was that Bain Capital was not a
venture capital firm, but focused on leveraged buyouts. Irony three, relative to the current campaign, is that Bain & Co. survived
partly because it forced the FDIC to accept a write-down of millions of dollars by outmaneuvering the government in earlier
contracts. How? Apparently through crony capitalism.
Leveraged buyouts, are legal, and can be an apparently good option in certain cases. For instance, if a founder wants to cash
out equity of a private company, a private equity firm might be the only apparently feasible or good solution.
A leveraged buyout is generally considered legal, except when the transaction itself clearly causes the failure of the target
company, although many seeming cases were apparently not prosecuted.
Few dispute that the legality of the transactions were generally accepted as legal at the time, and generally would be legal today.
The question is whether they were morally supportable, good business, and in best keeping of capitalist ideals.
If you own a business outright and it is just you, or you and your family, you can sell, ruin, or otherwise dispose of the business
any way you want. As soon as you have employees, you have certain fiduciary responsibilities, like withholding and paying taxes and
providing a safe environment. If you have a corporation, technically even if you are the sole shareholder, but especially if you
have other shareholders, you have a fiduciary responsibility, a duty of loyalty, and an expectation of a standard of care to
safeguard the company assets and future prospects.
While human beings are not owned by a corporation, or "a commodity or article of commerce", their relationship to the corporation
and good will are corporate assets. Likewise, the market position, relationships, product lines, and reputation of a company are
often important assets. In some cases the market has changed in a way impossible to go forward through (buggy whips are no longer
needed). In those cases, if no viable path can be found, perhaps the company needs to be shut down and liquidated. Outside of
those rare cases, even if there is disagreement or other problems, it is the responsibility of those running and making decisions
for a company to safeguard all assets.
Unions, and strikes, of one type or another have existed since nearly the the founding of the US. For a long time only highly
skilled tradesmen were organized and struck, but eventually "unskilled" labor joined in organizing. Originally, you had landowners
and those that worked for them, with a few businesses not too centered on land. After industrialization, land and factories,
representing large amounts of capital, employed workers who were often initially unskilled. Industrialists accumulated wealth while
workers were perhaps comfortable they were generally paid at a sub-accumulation level. This was done through competition with other
workers and the owner's desire to maximize profit. While employees would strike in some cases, the deals worked out were mainly
wage and benefits based.
For various reasons, including widespread lack of higher education and desperation of avoiding trying to live without a safety net,
along with somewhat long-term stability of industrial jobs, the serf-like arrangement was accepted for long periods.
Romney and Bain Capital leveraged into numerous companies. In several, perhaps many, cases, they extracted all available cash,
liquidated assets, and generally bilked creditors while pocketing exorbitant fees. The outlines of the deals seem to represent
self-dealing and lack of fiduciary responsibility. What they certainly represent is poor business management and an inability to
manage the value in employee and corporate good will and assets. It is a given that major jumps in competitiveness of the market
happened as Asia and other markets grew and traded more aggressively. Clearly some of these companies had plenty of cash or assets
on hand since Bain extracted $100M or more. With that much runway, a good steward of all of those assets could have found a way to
become competitive. People are not stupid. Except in the case where you are raiding the company at everyone's expense, you could
use transparency about the realities of the market to lower pay and overhead while the company transforms. Instead of real
leadership and good business, Bain and others stupidly trashed large, successful businesses, profiting massively in the process.
You might say that companies like Bain don't know what to do with some investments, so they resort to milken the equity which leads
to "Bain Drain".
Some of these deals must have had to pass FTC and state regulator scrutiny. While the accountants and regulators are likely very
focused on deal mechanic specific details, there has to be ways in which some consideration for "public good" should constrain
approval of deals if there is a more promising choice.
How do workers prevent this from happening to them? Is the only solution some kind of socialist control of company's actions? Of
course not. I think the things that were missing was A) any serious ambition on the part of workers and managers to buy out
companies, B) lack of attempts to pool their talent to create a competitor if fair agreements aren't reached, C) selfishness of
owners of not putting equity on the table, D) self-dealing and lack of fiduciary follow through.
At a glance, this might seem unlikely. Why would corporate owners, and especially leveraged buyout private equity firms (aka
corporate raiders) go along with this? Why? Because it works. That is in fact roughly how Silicon Valley has worked for quite a
while. Startups offer equity to compensate for lower pay and high risk. The obvious side benefit is that workers are highly
motivated, generally more trustworthy, and tend to stick around a bit longer in the face of an onslaught of new, exciting
opportunities and offers. In the end, everyone is better off, including the founders, investors, employees/co-owners, the local /
national / worldwide ecosystem, and customers.
Larger companies that need to stay competitive (and know they need to stay competitive; some don't know or can't), have to offer the
best candidates competitive offers. Since often their stock is unlikely to experience a huge, predictable growth, real stock
options, which have a value of the difference between starting and after-vesting price, are not useful as incentives. Instead,
certain companies offer Restricted Stock Units (RSUs): These are basically grants of stock that vest in a way similar to stock
options, usually 25% per year. To avoid losing hot talent to startups, competitive tech companies make offers that amount to as
much as $300K/yr., including salary, bonus, and RSUs.
Stock options and RSUs are almost unheard of in most corporations in most parts of the US. It is much the same in Japan and other
overseas tech centers. This is one reason that Silicon Valley continues to succeed.
So why did so many US areas lose manufacturing and other industries and associated jobs without much of a fight? Was the owner vs.
serf worker divide so instilled from decades and lifetimes of experience that no one could think of a solution when the factory
didn't blow the whistle any more? Was the tendency to obey and respect (and depend on) authority so strong in the boomer and
pre-boomer generation that they couldn't overcome obstacles and control their own destinies?
Perhaps employees should be given right of first refusal in certain cases where the company might be exposed to failure. Or, after
no fault of their own a LBO deal leads to bankruptcy, they should have first right over assets. Additionally, employee ownership,
at least to some meaningful extent, should be more encouraged. Entities like Bain Capital might still need to be involved in some
cases where the employee / management buyout has to happen late in the game. In any case, an LBO company should have much more
strict scrutiny to assure that companies are not bled dry and that stakeholders are not taken while the LBO profits.
> The inability to repay debt in an LBO can be caused by initial overpricing of the target firm and/or its assets. Over-optimistic
> forecasts of the revenues of the target company may also lead to financial distress
> <https://en.wikipedia.org/wiki/Financial_distress> after acquisition. Some courts have found that in certain situations, LBO debt
> constitutes a fraudulent transfer <https://en.wikipedia.org/wiki/Fraudulent_conveyance> under U.S. insolvency law if it is
> determined to be the cause of the acquired firm's failure.^ <https://en.wikipedia.org/wiki/Leveraged_buyout#cite_note-32>
> the *Clayton Act *of 1914 made explicit the legal concept that "the labor of a human being is not a commodity or article of
> commerce" and hence not subject to the Sherman Act provisions which had been the legal basis for injunctions against union
The Mind of Mitt, Time Monday, Sept. 3, 2012 pg.21-31
"Among Romney's more controversial forays into the legal gray zone involved a department store merger in 1988 that depended on help
from Michael Milken, a notorious Wall Street figure known as the junk bond king. ... "
[Junk bonds -> $175 million profit with $30 million capital. 3 years after cash out, Stage Stores filed for bankruptcy due to debt.]
[Romney was matter of fact about business decisions to shutter factories, run over unions, etc. His goal was to increase the
investment he made, ignoring everything else.]
[Bain Capital closed plants and fired hundreds at American Pad & Paper. Bain got Ampad for $5M, bought an additional factory, laid
off 200 workers then hired them back as non-union at lower wages. They struck and the company was shutdown the plant, filing
bankruptcy in 2000. Bain made $100M+.]
[Romney liked to talk about "creative destruction" in his biography.]
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