Leveraged buyouts got into the primary contest because, in Iowa, Newt Gingrich was systematically attacked by TV ads. As Gingrich sees it, they caused his drop from the upper echelon of competitors to the lower one. Mostly, he blames Romney for this and, he decided to get even when he had the money (recently) to do so.
Gingrich aims to prove that Romney is not an honorable capitalist, but a predatory investor who made millions by closing up businesses and destroying jobs. He chose this target because Romney’s business career is his most important credential Destroy it, Gingrich reasons, and Romney’s credibility as a presidential candidate is ruined.
Gingrich points to some of Romney’s acquisitions that went sour and cost jobs, but nevertheless brought profit to Romney’s firm. This formula, Gingrich asserts, is predatory. And a heartless predator, he argues should not lead the Republican Party.
If Gingrich believes this, he is badly misinformed about leveraged buyouts. If he doesn’t believe it, his attempt to destroy an opponent in this way is simultaneously an attack against the capitalistic system – unacceptable behavior for a Republican.
Bottom feeders exist in the capitalistic system. They close down debt-ridden companies, sell the assets, pay the bills and pocket whatever is left. Those who do this work are not people haters or destroyers of jobs -- the jobs are already destroyed. Only the assets remain and converting them to cash is the sensible thing to do. They are the vultures of the business world.
Bain Capital is “one of the world’s leading private, alternative asset management firms…. It has five Divisions….”[i] This description of the huge firm destroys one of Gingrich’s inferences – that Bain, under Romney, was a bottom feeder whose mission is to close companies, destroy jobs and sell assets at a profit. This fringe business isn’t worthy of Bain’s attention.
Romney, as a young man, went to work for Bain and Company as a consultant. In 1994, he founded Bain Capital and he headed the firm until 1999 (with time out for a Senate race in 1994).
Bain initially concentrated on start-up businesses, but as time went on it moved into the risky leveraged buyout field where problems for the acquirer are larger, but the potential reward is higher. Acquired companies are heavily in debt, and have lost the ability to turn a profit.
When someone like Bain steps in, takes over, and assumes debt it must be because it sees a chance to develop a profit on operations backed up by, if that effort fails, a chance to bail out by selling assets. This game is not for the faint hearted.
Turnarounds always require organizational shake up. A dozen different things might cost jobs as the fixer reshapes the company into profitable mode. He may start with 2,000 employees and end up with half that number. Those who leave hate him and those who survive love him; the bank will be happy. The acquiring company has options: sell the rejuvenated company at a profit, or enjoy dividends or management fees. From the outside, a Gingrich can look inside and see nothing but the 1,000 jobless workers and the profits of the acquirer. Others will see 1000 protected workers and a healthy company, and they will applaud the acquiring company.
Sometimes the acquiring company cannot fix the acquired company in a reasonable amount of time. In such a case, the fixer will close the business, sell the assets, pay the bills and hope that the net proceeds cover its investment. From the outside, a Gingrich will look inside and see nothing but the lost jobs and (maybe) the profit the fixer made by selling assets. Others will see a noble attempt to fix the unfixable.
Gingrich’s shots at Romney deal with his leveraged buyouts. According to Yahoo Finance,[ii] 77 of these investments were made during Romney’s tenure; 30 percent didn’t work out. Some jobs were lost, perhaps in every company. But 70 percent of those companies, and the jobs that went with them, were protected. The net return to Bain from those investments was better than 50 percent.
If there were not companies like Bain to assume the inherent risks that are attached to leveraged buyouts, the aforementioned 77 companies would have been shut down and all of the jobs would have been lost. The existence of companies like Bain is a part of the capitalistic system that should be applauded, not reviled. And if these risk takers hit gold when they make the right gambles, who will deny them their rewards?
Mitt Romney was CEO of a huge firm that has international reach. He can be criticized on several fronts as a presidential candidate, but to denigrate his effectiveness as an executive because he successfully participated in a legitimate aspect of the capitalistic system is an insult to him and to the system that has made America great. It is also a blow to the Republican Party that will be felt at some point in the presidential campaign.
Newt Gingrich! -- Shame on you.
Robert Kelly is a retired CPA/Management Consultant, author of several books on baseball, politics and the national debt, and a freelance, award-winning journalist whose work has appeared in many newspapers. His latest book, Neck and Neck to the White House, is available at Amazon and the better bookstores. His e-mail address is firstname.lastname@example.org