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First of two parts

To assess Romney, look beyond the bottom line

He created jobs, closed factories, made enemies and inspired colleagues.

December 16, 2007|Bob Drogin | Times Staff Writer

Romney's team called local lawyers, businesses and small companies to ask how much they spent on such supplies. The answer was far less than Stemberg had said. He urged them to check again. "I said, 'These companies don't know what they spend. Go back and check the invoices.' I thought I'd never hear from them again," Stemberg recalled.

Ten days later, Romney's team phoned back. They would invest $650,000, with more to follow.

"They really did their homework," Stemberg said. "And the night before we opened our first store, Mitt came over and bought everyone pizza and gave a motivational speech."

Bain Capital cleared $13 million when Staples went public three years later. Today, Staples Inc. is the world's largest office products retailer.

Staples proved to be a high-profile success, but the take-home was small change compared to future paydays.

To boost profits, Romney and his team hatched an audacious plan to take control of established companies, not just start-ups. To do so, they used bank loans or other debt to leverage, or sharply increase, their investments.

To help pay off the debt, Romney's group immediately pulled money out of target companies, typically by stripping assets and paying itself high monthly management fees, preferred dividends and numerous other payments. They then sold their stake, or took the company public, as early as possible.

Two of Bain Capital's earliest deals proved how lucrative such leveraged buyouts could be.

In 1986, Romney's team put up $1 million in cash and $10 million in debt to buy equity in Calumet Coach, which built mobile medical systems. By the time Bain Capital sold its stake just over two years later, it had recouped 34 times its investment, corporate documents show.

Romney's team hit the jackpot again with Accuride, a truck wheel and rim company. They posted a down payment of $2.6 million in cash, but structured the deal with 40-to-1 leverage. After revamping production and imposing other changes, they sold Accuride a year and a half later for 24 times their investment.

With such payouts, the buyout business is "like the joke about sex," said Howard Anderson, head of a venture capital firm and lecturer at the Massachusetts Institute of Technology. "When it's good, it's very, very good. And when it's bad, it's still pretty good."

Just how good became clear when Bain Capital and another private equity group bought and sold credit reporting service Experian in just seven weeks, netting $251 million each. The Wall Street Journal dubbed it "one of the quickest big hits in Wall Street history."

For investors, Bain Capital rained money as it bought and sold more than 100 companies. During Romney's tenure, according to an outside investment firm, Bain Capital's first five private equity funds returned an average of 173% each year on realized investments, an astonishing record.

"It was Wild West financing, with profits to match," said Goss, the company's chief operating officer. "They kept rolling over their winnings."

One such deal carried a hidden cost, however. In 1994, Romney took a leave of absence to seek the U.S. Senate seat from Massachusetts held by Edward M. Kennedy, the longtime Democratic incumbent.

Making his first bid for elected office, Romney boasted that he had helped create more than 10,000 jobs at companies he had retooled. But Kennedy painted him as someone "who puts profits over people," and an ugly labor dispute soon helped sink Romney's campaign.

Bain Capital had bought a controlling interest in a paper products company called Ampad for $5 million in 1992. Two years later, after Ampad bought a factory in Marion, Ind., the new management team dismissed about 200 workers, slashed salaries and benefits, and hired strikebreakers after the union called a walkout.

"We were just fired," Randy Johnson, a former worker and union officer at the Marion plant, recalled in a telephone interview. "They came in and said, 'You're all fired. If you want to work for us, here's an application.' We had insurance until the end of the week. That was it. It was brutal."

In October 1994, Johnson and other striking workers drove to Massachusetts to protest Romney's Senate campaign. "We chased him everywhere," Johnson recalled. "He took good jobs with benefits, and created low-wage, part-time, no-benefit jobs. That's what he was creating with his investments."

At first, Romney tried to justify the Indiana layoffs as necessary in "the real world." He then sought to distance himself, arguing that he took a leave of absence from Bain Capital before Ampad bought the factory. The dispute proved potent, however, and Kennedy trounced him in the election.

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