Plenty of 'pitting' preceded Romney's profits

Published: Tuesday, July 3 2007 12:57 a.m. MDT

But his aw-shucks manner masked a determination to lead others his way. During his meetings with the Bain Capital partners, Stemberg got to see how Romney worked. "He was always very 'shucks, gee willickers' in how he'd say things. 'Gosh, you know, it strikes me that if we did such and such, we could deal with Arthur's concern, we could deal with Marty's concern, and Tom, I think it would be consistent with the strategy you wanted to pursue.' And mentally you'd say, 'Thank you very much."'

In 1990, during one of Bain Capital's weekly business review meetings, partner Stephen Pagliuca and others pitched the acquisition of the high-tech research firm Gartner Group. Romney cut through the clutter of statistics to pose one penetrating question: What would Gartner's focus be?

That question prompted a new round of analysis, which ended up shaping Bain's purchase and revamping of the company. After Gartner went public, Bain eventually saw a 1,500 percent return on its investment. It was a stunning figure by the standards of most investments, but hardly unheard of in the world of leveraged buyouts.

Costly associations

Bain Capital soon began cashing out its investments, and eventually the $37 million fund returned more than $200 million.

Bain's second fund topped $100 million, primarily from wealthy individuals, but it got off to a rocky start. Bain Capital lost most of the money in early leveraged buyouts. But the firm soon regained its touch.

In one 1988 deal, known as Specialty Retailers Inc., Bain Capital used junk bonds from Drexel Burnham Lambert to finance the purchase of two Texas retailers. Junk bonds have low credit ratings and are therefore considered high risk, but also usually have high yields. A few months earlier, in connection with insider trading scandals, the Securities and Exchange Commission had sued Drexel and the man who built its junk bond business, Michael Milken.

Bain Capital went ahead anyway. Romney had kicked off the road show for potential investors, appearing at Milken's Beverly Hills headquarters. When Bain Capital was through with the deal, it had converted its $10 million investment into a payout that exceeded $180 million.

It was just one more seemingly unfathomable payout for the firm, and Romney. But it would come at a cost.

Although Bain Capital was far removed from the scandals that brought down Drexel and Milken, its association with the junk-bond king came back to haunt Romney when he eventually ran for office. His political opponents would use his Drexel connection to depict Romney as a greedy corporate raider. Other deals from this period would also bring him political baggage.

Perhaps the most legally thorny was Bain Capital's 1989 purchase of Damon Corp., a Needham medical testing firm that later pleaded guilty to defrauding the federal government of $25 million and paid a record $119 million fine.

Romney sat on Damon's board. During Romney's tenure, Damon executives submitted bills to the government for millions of unnecessary blood tests. Romney and other board members were never implicated.

More than a decade later, when Romney was in pursuit of the Massachusetts governorship, his Democratic opponent Shannon O'Brien accused him of lax oversight at Damon and failing to report the fraud.

Romney replied that he had helped uncover the illegal activity at Damon, asking the board's lawyers to investigate. As a result, he said, the board took "corrective action" before selling the company in 1993 to Corning Inc.

But court records suggest that the Damon executives' scheme continued throughout Bain's ownership, and prosecutors credited Corning, not Romney, with cleaning up the situation. Bain, meanwhile, tripled its investment.

Romney personally reaped $473,000.

Money made, jobs lost

In many ways, Damon shows the pitfalls of launching a political career from the buyout industry.

Maximizing the financial return to investors can mean slashing jobs, closing plants, and moving production overseas. While Bain Capital helped expand companies that created jobs, the firm also engaged in some of the business's harsher practices.

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