[FoRK] Bain Drain

Stephen D. Williams sdw at lig.net
Sun Sep 2 03:45:24 PDT 2012

Weirdly, the earlier link to this shows an Xbox commercial and never moves on to the article:

On 9/2/12 3:38 AM, Stephen D. Williams wrote:
> 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[2], 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[1], 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"[3], 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.[3][4]  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[1][5] 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.
> [1] http://www.rollingstone.com/politics/news/the-federal-bailout-that-saved-mitt-romney-20120829
> [2] https://en.wikipedia.org/wiki/Leveraged_buyout
>> 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.^[33] <https://en.wikipedia.org/wiki/Leveraged_buyout#cite_note-32> 
> [3] http://www.socialstudieshelp.com/Eco_Unionization.htm
>> 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 
>> organization.
> [4] https://en.wikipedia.org/wiki/Labor_unions_in_the_United_States
> [5] http://www.time.com/time/magazine/article/0,9171,2122770,00.html
> 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.]
> sdw

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