Plenty of 'pitting' preceded Romney's profits

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

During the 2002 gubernatorial campaign in Massachusetts, Democratic candidate Thomas Birmingham charged that Romney had "amassed a fortune on the backs of working people."

Fair or not, the criticism gets at an essential difference between buyout firms and companies rooted in their communities, says Ross Gittell, a professor at the University of New Hampshire's Whittemore School of Business and Economics.

Companies like Bain Capital typically cash out of their investments in three to five years, and "usually have less of a stake in the community, in terms of employment, service on nonprofit boards, your physical and environmental impact," Gittell says. "The objective is: make money for investors. It's not to maximize jobs."

Few Bain Capital deals exposed that objective more starkly than Ampad.

In 1992, Bain Capital acquired American Pad & Paper, or Ampad, from Mead Corp., embarking on a "roll-up strategy" in which a firm buys up similar companies in the same industry in order to expand revenues and cut costs.

Through Ampad, Bain bought several other office supply makers, borrowing heavily each time. By 1999, Ampad's debt reached nearly $400 million, up from $11 million in 1993, according to government filings.

Sales grew, too - for a while. But by the late 1990s, foreign competition and increased buying power by superstores like Bain-funded Staples sliced Ampad's revenues.

The result: Ampad couldn't pay its debts and plunged into bankruptcy. Workers lost jobs and stockholders were left with worthless shares.

Bain Capital, however, made money — and lots of it. The firm put just $5 million into the deal, but realized big returns in short order. In 1995, several months after shuttering a plant in Indiana and firing roughly 200 workers, Bain Capital borrowed more money to have Ampad buy yet another company, and pay Bain and its investors more than $60 million - in addition to fees for arranging the deal.

Bain Capital took millions more out of Ampad by charging it $2 million a year in management fees, plus additional fees for each Ampad acquisition. In 1995 alone, Ampad paid Bain at least $7 million.

The next year, when Ampad began selling shares on public stock exchanges, Bain Capital grabbed another $2 million fee for arranging the initial public offering - on top of the $45 million to $50 million Bain reaped by selling some of its shares.

Bain Capital didn't escape Ampad's eventual bankruptcy unscathed. It held about one-third of Ampad's shares, which became worthless. But while as many as 185 workers near Buffalo lost jobs in a 1999 plant closing, Bain Capital and its investors ultimately made more than $100 million on the deal.

The 1990s proved really good for Bain Capital and partners, whose annual earnings hit seven figures. The firm raised several more funds, and acquired companies with some of the best-known brand names, including Domino's Pizza and the Sealy mattress company.

One deal, the acquisition and sale of credit report provider Experian, netted Bain $200 million in two months.

Despite this success, Romney remained cautious. In 1996, Bain Capital launched a hedge fund, a lightly regulated investment pool focused mainly on stocks, for the firm's partners and some clients. When the fund lost money in the first few months, Romney wanted to close it and return all the money invested, according to two colleagues. Other partners persuaded him to wait, and the fund took off, growing from less than $100 million in 1996 to nearly $7 billion today.

In 1997, he balked again, at the acquisition of a Los Angeles video distributor and movie producer that would be renamed Artisan Entertainment and become famous for producing the movie "The Blair Witch Project."

Romney worried that Bain Capital's image would suffer from the perception it "had gone Hollywood," according to Rehnert, the Bain partner who proposed he deal.

Romney had another problem. The studio had an extensive library of R-rated films, which The Church of Jesus Christ of Latter-day Saints discourages its members from watching.

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