I wouldn’t be inclined to recommend a book about leveraged buyouts to most people, but Josh Kosman’s The Buyout of America is actually a very good and engaging read. I’ve discussed leveraged buyouts before, and how they are essentially a high-end form of a mob bustout. For those of you keeping score at home, Mitt Romney, founder of Bain Capital, did this for a living. In many cases, Bain saddled a company with debt, engage in shenanigans, including adding more debt, to drive up the companies’ Wall Street valuation, and then used that debt to pay back Bain’s investment plus copious ‘management fees.’ Often these companies limped along or went bankrupt because of their debt (this debt wasn’t to expand the business by building a factory, but used to line Bain’s pockets). One such company is Dade-Behring of Miami, FL, which was ultimately driven into bankruptcy.
What’s remarkable about Bain and Romney’s relationship with Dade-Behring is that Bain wasn’t very good at running the business. If they hadn’t decided to loot the company, they would have ended up making more money. Kosman describes what happened as Dade-Behring neared bankruptcy (boldface mine):
Private equity firms are often reckless when they have their companies declare dividends. Gain put Dade Behring in deep debt for the second time, after already wringing costs out of the business to pay back part of the loans taken to finance the initial buyout, forcing it to find new areas to cut. Now pretty much the only place left was the core of the business.
Dade controller Michael Johnson, who provided the Miami forecast and now is the chief financial officer at TPG-owned Fenwal Blood Technologies, said the company took chances in 1999 by not take insurance against the euro, even though it had significant European operations through its merger with Hoechst’s division. Instead, the PE firms had Dade borrow near the maximum it could and did not worry about what would happen afterward. Over the next two years, Dade paid for its cheapness: the euro fell in value and seriously affected sales of products within Europe. Dade’s revenue fell from $1.29 billion in 1998 to $1.23 billion in 2001…
Meanwhile, Michael Johnson helped close down Dade’s Miami office in 1999, consolidating operations with a similar division in Germany. There were 850 Miami employees. No amount of closing divisions or firing workers, though, could save the company from its crushing debt load. In August 2002, Dade Behring voluntarily filed for bankruptcy protection.
But here’s when Bain’s mediocrity shines through (boldface mine):
Dade’s creditors took over the business, and Bain lost all its shares. But Bain and Goldman, after putting down only $85 million to buy Dade and receiving the $365 million, made a $280 million profit. After the bankruptcy, the creditors agreed to cut the company’s debt by more than half for company shares. They were willing to do this because they saw that if Dade focused on growth and not paying debt, it had the potential to be a strong business. Dade began pumping money into R & D–more than 8 percent of revenue in 2003, 2004, and 2005. And by 2006, Dade’s sales had risen 40 percent to $1.74 billion. The next year, Siemens bought the company for $6.7 billion, five times more than its value at the time of the bankruptcy.
Bain generated very good returns by taking a distribution from Dade but could have done far better if it had built the business.
Do you really trust Mitt Romney to look out for your job? Just asking.