|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
Romney had come to Drexel to obtain financing for the $300 million purchase of two Texas department-store chains, Bealls and Palais Royal, to form Specialty Retailers, Inc. On September 7, 1988, two months after Bain hired Drexel to issue junk bonds to finance the deal, the S.E.C. filed a complaint against Drexel and Milken for insider trading. Romney had to decide whether to close a deal with a company ensnared in a growing clash with regulators. The old Romney might well have backed off; the newly assertive, emboldened Mitt decided to press ahead.
Romney’s deal with Drexel turned out well for both him and Bain Capital, which put $10 million into the retailer and financed most of the rest of the $300 million deal with junk bonds. The newly constituted company, later known as Stage Stores, refocused in 1989 on its small-town, small-department-store roots. Seven years later, in October 1996, the company successfully sold shares to the public at $16 a share. By the following year, the stock had climbed to a high of nearly $53, and Bain Capital and a number of its officers and directors sold a large part of their holdings. Bain made a $175 million gain by 1997. It was one of the most profitable leveraged buyouts of the era.
Romney sold at just the right time. Shares plunged in value the next year amid declining sales at the stores. The department-store company filed for Chapter 11 bankruptcy protection in 2000, struggling with $600 million in debt, and a reorganized company emerged the following year. So ended the story of a deal that Romney would not be likely to cite on the campaign trail: the highly leveraged purchase, financed with junk bonds from a firm that became infamous for its financial practices, of a department-store company that had subsequently gone into bankruptcy. But on the Bain balance sheet, and on Romney’s, it was a huge win.
Not every deal worked out so well for Romney and his investors. Bain invested $4 million in a company called Handbag Holdings, which sold pocketbooks and other accessories. When a major customer stopped buying, the company failed and 200 jobs were lost. Bain invested $2.1 million in a bathroom-fixtures company called PPM and lost nearly all of it. An investment in a company called Mothercare Stores also didn’t pan out; the firm had eliminated a hundred jobs by the time Bain dumped it. Fellow Bain partner Robert White said Bain lost its $1 million and blamed “a difficult retail environment.”
In some cases, Bain Capital’s alternative strategy of buying into companies also ended in trouble. In 1993, Bain bought GST Steel, a maker of steel-wire rods, and later more than doubled its $24 million investment. The company borrowed heavily to modernize plants in Kansas City and North Carolina—and to pay out dividends to Bain. But foreign competition increased and steel prices fell. GST Steel filed for bankruptcy and shut down its money-losing Kansas City plant, throwing some 750 employees out of work. Union workers there blamed Bain, then and now, for ruining the company, upending their lives, and devastating the community.
Then, in 1994, Bain invested $27 million as part of a deal with other firms to acquire Dade International, a medical-diagnostics-equipment firm, from its parent company, Baxter International. Bain ultimately made nearly 10 times its money, getting back $230 million. But Dade wound up laying off more than 1,600 people and filed for bankruptcy protection in 2002, amid crushing debt and rising interest rates. The company, with Bain in charge, had borrowed heavily to do acquisitions, accumulating $1.6 billion in debt by 2000. The company cut benefits for some workers at the acquired firms and laid off others. When it merged with Behring Diagnostics, a German company, Dade shut down three U.S. plants. At the same time, Dade paid out $421 million to Bain Capital’s investors and investing partners.
The amount of money now being earned at Bain Capital was skyrocketing, and much of it came from a handful of giant deals. During Romney’s 15 years there, the firm invested about $260 million in its 10 top deals and reaped a nearly $3 billion return. That was about three-quarters of its overall profit on roughly 100 transactions during Romney’s tenure. In one of his most specific explanations of how he made his fortune, in his autobiography, Turnaround, Romney wrote that most of the companies he invested in were ones that “no one has heard of—TRW’s credit services, the Yellow Pages of Italy.” Those weren’t just any two deals. They were two of the most lucrative of Romney’s career, and luck played a big part in both. A mere seven weeks after buying TRW, Romney and his partners flipped the company. Bain’s $100 million investment returned at least $300 million. The second deal cited by Romney took longer but involved even more good timing and luck. It began with a renowned Italian investor named Phil Cuneo, who had the idea of buying the Italian version of the Yellow Pages. It seemed a solid investment in a firm with a staid and stable business model. But mere months after closing the deal, Cuneo and his Bain associates realized that they had acquired a company that might benefit from the surging interest in dot-com businesses; the Yellow Pages company owned a Web-based directory that had the potential to be the Italian version of America Online or Yahoo. In just under three years, in September 2000, the partners sold the investment, earning a windfall that far exceeded anyone’s initial expectations. Bain’s $51.3 million investment in the Italian Yellow Pages returned at least $1.17 billion, according to a Romney associate familiar with the deal. There is no public documentation of how the profits were distributed, but at that time at least 20 percent of the return would have gone to Bain Capital. Of that, Romney’s typical payout was then 5 to 10 percent. That means this one obscure deal would have given him a profit of $11 million to $22 million. If Romney made a side investment in the deal, as was standard among Bain partners, he would have made even larger gains. One Romney associate said Romney’s total profit could have been as much as $40 million. (A Romney spokesman did not respond to questions about the deal.)
It was those kinds of deals that enabled Bain Capital to report the highest returns in the business in the 1990s. Romney’s own net worth would grow to at least $250 million, and maybe much more, a trove that would enable him to foot a large part of the bill for his 2008 presidential campaign. Asked about a report that his wealth at one point reached as high as $1 billion, Romney said, “I’m not going to get into my net worth. No estimates whatsoever.”