Cohan: Bain Capital's 'creative destruction' destroyed lives
Is there any fairness in a system where a group of people can borrow a bunch of money to buy a company and pay themselves millions of dollars in dividends and fees, while the company itself ends up bankrupt and its employees lose their jobs, health insurance and pensions?
Can you imagine the owners then being celebrated in fancy society while the unfortunate workers are left to fend for themselves as the collateral damage of the system?
Welcome to Mitt Romney's America.
This is the true story of how in October 1993 buyout firm Bain Capital LLC, which Romney founded and ran from 1984 to (roughly) 1999, and its partners bought a steel mill in Kansas City, Mo., from Armco Steel Corp. for $75 million, merged it with other steel companies, loaded it with too much debt, paid themselves big dividends and ran the company into the ground. Bain's behavior was all perfectly legal, of course, and many argue that this is an essential part of the creative destruction that is capitalism (except when there are huge bailouts, of course).
In many ZIP codes around Boston, Chicago, Los Angeles, New York and San Francisco, Bain and its partners are celebrated and admired. Many graduates of our finest colleges, universities and graduate schools would almost kill to get a job at Bain, with its elegant offices and promise of great wealth for the lucky few. And now one of them may well end up in the White House.
But there's a darker side to this fairy tale, and the Armco deal is a perfect illustration.
For its $8 million in cash -- largely taken from its outside investors -- Bain Capital received a majority stake in the steel company, renamed GS Technologies Inc. The minority investors were GE Capital, a division of General Electric Co. that provided the new company with a line of credit; Leggett & Platt Inc., a large customer of the steel plant; and a group of former and existing managers.
The new company paid Bain an annual $900,000 fee for "professional services," a standard private-equity trick to begin sucking fees out of an acquired company. Three Bain executives, Bob White, Paul Edgerley and John O'Malley, went on the board of the company. (White remains a close Romney adviser.)
In short order, Bain did to GS Technologies what it has done to any number of other companies that it purchased with other people's money -- among them American Pad & Paper and Dade International, which both went bankrupt. In August 1994, 10 months after the sale was completed, GS Technologies issued $125 million of 12 percent senior notes. Some $55 million of the proceeds went to repay existing debt, while $65 million went out as a dividend to shareholders. Of the $65 million, Bain took $36.1 million, more than four times its original investment.
In October 1995, Bain arranged for the company to merge with Georgetown Steel, a steel-rod manufacturer in South Carolina. As part of the acquisition, the merged company issued another $125 million in senior notes and refinanced the existing credit facility. The partners invested $30 million more of equity in the merged company, with $16.5 million of that coming from the dividend Bain had taken earlier.
The merged company, renamed GS Industries Inc., was to have annual revenue of $941 million, net income of $13 million and 3,800 employees. It also had about $370 million in long-term debt -- eight times its earnings before interest, taxes, depreciation and amortization -- and about $180 million of additional long-term liabilities such as future health-care and pension payments.
In the end, GSI didn't work out as planned. For many reasons -- tough competition from abroad, a high-cost structure, too much debt related to the acquisitions, and the cost of the dividends paid to Bain and GE Capital -- the company filed for bankruptcy on Feb. 7, 2001. It closed the Kansas City plant and fired 750 workers. Many of the employees' benefits were eliminated, including long-term health-care coverage, life insurance and parts of pensions.
Asked what happened at GSI, a Bain spokesman told Reuters in January 2012, "Over $100 million and many thousands of hours were invested in GSI to upgrade its facilities and make the company more competitive during a seven-year period when the industry came under enormous pressure and 44 U.S. steel companies went into bankruptcy."
After pointing out that another steel company Bain owned, Steel Dynamics, is a successful $6-billion business, the spokesman said Bain's focus "remains on building great companies and improving their operations." The GSI debacle has been in the news lately because of a campaign ad made by a group supporting President Barack Obama. It features Joe Soptic, who worked at the Kansas City plant for 28 years and lost his job when the company filed for bankruptcy.
Soptic lost a significant part of his monthly pension and his health-care benefits. He eventually found a new job as a school janitor paying him $24,000, about two-thirds less than what he had been paid as a steelworker at GSI.
Also part of Soptic's story is his wife, Ranae. She was no longer covered by her husband's health-care plan. Then she got sick with pneumonia. It was too late by the time she went to the hospital: She had advanced lung cancer and died two weeks later. Soptic wiped out his $12,000 of savings to pay the hospital bills; the hospital wrote off the balance of the $18,000 he owed.
Romney supporters point out that this was years after the bankruptcy and that Ranae Soptic had quit a job that provided health insurance, which is true but irrelevant. If the old Armco plant hadn't been run into the ground and her husband had kept his job, she would have had coverage. And the Soptics' story is a sidebar. The real point is how a man who wants to be "CEO of America" left a trail of destroyed lives when he was only chief executive officer of a single private-equity firm.
Romney is a very wealthy man, worth at least $250 million. His partners, including White, are very wealthy, too. They got rich at Bain Capital doing again and again and again the things they did at GSI, involving hundreds of others companies and thousands of other people. Not all worked out like GSI of course, and some were big successes. But the inequity of it all just seems unworthy of a great nation.
Writer William D. Cohan, the author of "Money and Power: How Goldman Sachs Came to Rule the World," is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own. Email him at William D. Cohan at firstname.lastname@example.org.