Plenty of 'pitting' preceded Romney's profits

Published: Tuesday, July 3 2007 12:00 a.m. MDT

The new venture would be called Bain Capital. It would buy companies, retool them with Bain techniques, and resell them at a profit. The partners quickly agreed Romney should lead the new enterprise. Although still in his mid-30s, he was among the firm's best consultants. More important, Bain trusted Romney to be prudent and not tarnish Bain's name.

After all, Bain & Company was taking a big risk. If Bain Capital-run companies failed, using the "Bain way," clients might well reconsider paying big fees for Bain & Company's consulting services.

In early spring of 1983, with the sun pouring into his office in the Faneuil Hall marketplace, Bain offered Romney the job that would make his career. Romney balked, catching Bain off guard.

Romney explained that he didn't want to risk his position, earnings and reputation on an experiment in investing. The offer was appealing, Romney recalled in a recent interview, but he wasn't going to make such a decision in a "light or flippant manner."

So Bain sweetened the offer. He guaranteed that if the experiment failed, Romney would get his old job and salary back, plus any raises handed out during his absence.

Romney had one more concern: the impact on his reputation should he prove unable to do the job. In the end, Bain agreed to craft a cover story if necessary, promising to bring Romney back to the consulting firm and explain Romney's return as a matter of his being more valuable to Bain as a consultant.

"So," Bain says, "there was no professional or financial risk."

Defined by caution

Bain Capital initially set up down the hall from Bain & Company, and Romney pulled together a team from the firm's brightest young consultants. Romney ran the operation as the general partner, answering to Bain.

Their first job: raise the investment fund. Romney and a Bain Capital partner, Coleman Andrews, went on the road, using overhead projectors and Romney's mastery of details to woo investors. During one pitch, Andrews recalls, an investor asked if Romney would spend money on fancy offices and big expense accounts.

Andrews told him not to worry about Romney. "He pops his own popcorn and takes it to the movies."

Frugal with his own money, Romney insisted that Bain Capital be especially careful with other people's money.

The office was Spartan, furnished with gray metal desks. When partners traveled, they flew coach. Andrews recalls that the rule for meals on the road was: "They should be nourishing, but not memorable."

Romney's cautious approach quickly defined Bain Capital. He worried all the time. "He was troubled when we didn't invest fast enough, he was troubled when we made an investment," Andrews says. "He never wanted to fall short on commitments or representations made to investors."

Quite apart from the swashbuckling era of 1980s corporate deals, where one buyout firm spent only six weeks to hatch a $25 billion takeover, decisions at Bain Capital were tested and retested, debated, discussed, and challenged. Any partner could veto a deal, so the case had to be strong enough to convince them all.

At weekly meetings, Romney took deals apart, found weak spots in the analysis, and argued against going forward. He was so relentless in playing the role of devil's advocate that partner Bob White would later admit to sitting in the meetings occasionally wanting to "punch him in the nose."

By 1986, Bain Capital had invested very little. But that year proved a turning point, with major deals that put the firm on the map. The best known was Thomas Stemberg's office supply company, Staples Inc.

At the time, companies bought most of their pens, pencils and paper from small stationers, usually at significant mark-ups. Stemberg, a former supermarket executive, wanted to change that, but couldn't find investors.

One venture capitalist scoffed at Stemberg, "Why in the world would anyone try to save money on paper clips?"

But Stemberg found someone who would.

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