Posted on Mon, May. 28, 2012
last updated: May 28, 2012 07:11:48 AM
Four years ago, entrepreneur Jon Darbyshire needed help.
His Overland Park company, Archer Technologies, was pulling down strong profits selling special risk management software to some of the biggest firms in the nation. He wanted to take cash out of the company, but he wasn't sure how.
Enter Boston-based investment firm Bain Capital, which decided to buy a $24 million stake in Archer and install directors to offer advice.
A year later, Bain helped Darbyshire find a buyer who paid $200 million for Archer, enough cash for him to launch a foundation now helping entrepreneurs and nonprofits.
Bain did OK, too. Its $24 million investment grew to more than $75 million in just 13 months.
"The relationship was amazing," Darbyshire said. "They helped us hire a few key employees. ... We never fired a single person."
Jeff Jones' experience with Bain Capital wasn't so sweet.
Jones was a worker at Kansas City-based GST Steel when Bain took the aging company into bankruptcy in 2001, tossing 750 people out of work.
"All they did was pillage the profits out of it," he said.
Is Bain a predatory vampire sucking workers' lifeblood? Or is it a capitalist angel injecting crucial seed money for job-providing startups?
Actually, it's both.
"I would love this debate to result in a broader public understanding of what's going on," said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at the Tuck School of Business at Dartmouth University.
"The public badly misunderstands this."
Two years ago, most Americans had never heard of Bain Capital. Neither did they understand its connection to its co-founder -- former Massachusetts governor Mitt Romney, the all-but-certain Republican nominee for president.
Now, in the long post-recession hangover often blamed on Wall Street's swashbuckling ways, Bain Capital's role in the American capitalist economy is at the center of a fierce political dispute. It's a debate that rolled across televisions and websites all last week. Venture, equity capital
Bain Capital -- like dozens of similar firms -- collects cash from hundreds of investors. Some are wealthy private individuals, but they can also be college endowments, charities and pension funds.
The firm spends that cash to buy other companies. Bain's investors, in turn, get the profits or bear the losses after Bain takes a percentage for itself.
Confusion over Bain's business model is common because it uses different subsidiaries to make money in different ways.
Bain Capital Ventures, for instance, is the unit that invested $24 million in Archer Technologies. Such venture capital funds often buy small startup companies with growth potential because the payoff can be huge. Venture investors in Facebook or Google, for example, became overnight multimillionaires.
"Venture capital focuses on creating companies from scratch," said Emily Mendell, spokeswoman for the National Venture Capital Association. "Creating jobs. Harnessing innovation."
By contrast, Bain Capital Private Equity -- another Bain subsidiary -- makes its money very differently.
It targets underperforming or distressed older companies, often with borrowed cash, then tries to improve the acquired company's balance sheet. Sometimes that means firing workers, closing plants or replacing management. Sometimes those efforts rescue the company, but sometimes they go bad, leaving workers and other stakeholders with nothing.
Bain's acquisition of GST Steel in the middle 1990s was a private equity endeavor. It borrowed money to upgrade the plant, hoping to invigorate the business and either run it or sell it at a profit.
Instead, a slumping market for U.S. steel, a labor dispute and Bain's decision to repay itself for its initial investment just months after buying GST eventually led to the bankruptcy that is now the subject of angry campaign commercials from Romney's opponents.
Bain's private equity investments in the Kansas City area aren't limited to GST Steel.
Bain Capital Private Equity owns part of AMC Entertainment, a Kansas City-headquartered company being sold to a Chinese firm. It owns millions of shares of stock in Hospital Corporation of America, whose local subsidiary -- HCA Midwest -- runs Menorah Medical Center, Overland Park Regional Medical Center and several other facilities. Bain owns part of Cumulus Media, which owns KCFX-FM, KCMO-FM and a handful of other Kansas City radio stations.
None of those companies suffered GST's fate. But unlike Archer Technologies, some of their employees felt pain under Bain's partial ownership.
Cumulus has laid off hundreds of workers, including some in Kansas City. HCA Midwest, one of the area's largest private employers, has had issues with nurse unionization efforts. AMC went on the block, some analysts said, because management did not want spend the cash to invest in new technologies and theaters.
In an emailed statement, an HCA spokesman called Bain Capital a "valued partner" in growing the health care firm. AMC president and CEO Gerry Lopez said Bain's role in the theater chain is minimal. The Kansas City office of Cumulus did not respond to phone calls.
Analysts say it's hard -- perhaps impossible -- to know if Bain's stakes in those firms caused the companies' problems or helped address them.
Consider radio stations. Like most mass media in the digital age, they face enormous headwinds. So do movie theaters. Health care expenses are under scrutiny. Bain supporters say the companies might have gone bust, costing thousands more jobs, had the Boston firm not invested in them.
The same is true, they say, of Dunkin' Donuts, Burlington Coat Factory, Toys R Us or Quintiles -- all companies with Kansas City area employees and partly owned by Bain Capital Private Equity.
"Last year, private equity invested nearly $144 billion into the U.S. economy," said Noah Theran, spokesman for the Private Equity Growth Capital Council. "Strengthening companies is the cornerstone of the private equity business model."
Yet critics say private equity investors' profit motive chases near-term payoffs without regard to saving jobs, nurturing communities or necessarily even building strong companies.
"Once the buyout is completed, the private equity guys start swinging the meat ax, aggressively cutting costs wherever they can," wrote author Josh Kosman in Rolling Stone magazine, "so that the company can start paying off its new debt by laying off workers."
Bain Capital did not respond to The Star's request for comments. Romney's role
Mitt Romney wasn't with the company he founded for most of these transactions.
"Since Feb. 11, 1999, Mr. Romney has not had any active role with any Bain Capital entity and has not been involved in the operations of any Bain Capital entity in any way," his 2011 presidential campaign financial disclosure statement says.
Romney has repeatedly said he had no role in the GST bankruptcy.
"That's hardly something which is on my watch," he said this month.
Still, Romney profited from Bain's decisions -- almost certainly including the GST purchase and bankruptcy -- long after he left the company. That gives him a strong incentive to keep his eye on the company's performance.
The GOP front-runner's financial statement shows Romney earned between $1.5 million and $9 million from his Bain investments in 2010. The statement says those assets were worth between $12 million and $60 million at the end of that year.
Democrats say Romney's profits from Bain, and his role as a founder of the firm, make its decisions fair game for voters.
"What Gov. Romney doesn't seem to get is that a healthy economy doesn't just mean a few folks maximizing their profits through massive layoffs or busting unions," President Barack Obama told supporters last week, according to The Denver Post.
Romney was quick to respond.
"There's no question he's attacking capitalism," he told an interviewer.
And on Fox News: "Bain Capital ... made about 350 investments since the beginning of the firm, and of those investments, about 80 percent grew their revenues."
Obama's criticism hasn't cut off his support from some Bain workers. The Center for Responsive Politics said Thursday that Bain-related interests have given Obama-related campaign committees more than $152,000 this election cycle.
At the same time, not all Democrats agree with Obama's critique or the series of Bain-critical videos available this month.
Mayor Cory Booker of Newark, N.J., called the focus on Bain "nauseating" a week ago, a comment that soon found its way into a Romney video. (Booker walked back from the criticism during the week.)
Obama supporter Steve Rattner wrote: "Whatever its flaws, private equity has made a material contribution to sharpening management. But don't confuse a leveraged buyout with job creation."
Rattner was involved in the government rescue of the automobile industry, which actually resembled a private equity deal. After restructuring, billions of dollars were poured into the auto firms, helping them stabilize.
The money came from taxpayers, of course, not private investors. But Dartmouth's Blaydon said the similarities between the auto bailout and a private equity deal may reveal hypocrisy from both presidential hopefuls -- Obama touts the bailout, while Romney opposed it.
"While we made the auto industry profitable, it was painful for a lot of people," including workers who took pay cuts or lost their jobs, some suppliers, and car dealerships that closed, Blaydon noted. "We can't ask (companies) to protect everyone who might be adversely affected."
Democrats have squirmed about the party's split over the Bain story, but Republicans aren't off the hook. Newt Gingrich and Rick Perry launched bitter attacks against Romney and Bain in January -- Perry called the company "vultures" -- comments Democrats gleefully posted on the Web.
So is Bain Capital an economic saint or sinner?
"I don't think Mitt Romney knows how to create jobs," said Jones, the former GST worker. "I think he knows how to shut plants down."
Darbyshire -- who sold Archer Technologies and earned millions, with Bain's help -- disagrees.
"I'm very pro-Mitt from an entrepreneurial perspective," he said. "It's companies like Bain Capital that really understand how the economy works."