Finders Weepers: Early Bain Disputes Cast New Light on Its Business
by Jesse Eisinger, ProPublica.
It was one of the “quickest big hits in Wall Street history,” as the Wall Street Journal put it at the time.
In 1996, an investment group including Bain Capital, the firm then run by Republican presidential candidate Mitt Romney, sold the consumer credit information business Experian to a British retailer, making a $500 million profit. Bain and the other investors who reaped that windfall had closed the acquisition a mere seven weeks earlier, stunning the investing world.
Another party was stunned by the deal, but for a different reason. James McCall Springer believed that he had brought the idea to buy Experian to Bain in the first place.
Springer sued to get what he contended was his rightful finder’s fee, eventually settling. And he wasn’t the only one. At least three other parties had similar legal disputes with Bain during the early 1990s, when Romney led the company, raising questions of how rough-and-tumble the company could be. The suits also shed light on how Bain actually operated, complicating one of the main narratives Bain, the Romney campaign, and many commentators have used to describe the private equity firm.
The Romney campaign declined to respond to a request for comment on the lawsuits. Bain did not respond to a request for comment. And, of course, disputes about finder’s fees are not uncommon; large sums are at stake for little work, a situation ripe for claims of aggrandized roles.
Most accounts of Bain characterize the firm as full of hard-working young men who sought to find troubled companies, invest in them and turn them around. Romney’s presidential campaign website says that “under his leadership, Bain Capital helped to launch or rebuild over one hundred companies.” Romney campaigns have embraced his reputation as a turnaround artist, as he has run on his private equity record and his overhaul of the 2002 Salt Lake City Olympics. He even titled his 2004 book “Turnaround,” a memoir and account of the 2002 Salt Lake City Olympics.
But as the disputes illuminate, the reality of Bain’s business in the early years is more complicated.
Often, Bain wasn’t finding companies on its own. Finders and middlemen were more common in the early days of private equity than they are now. Smaller firms would seek out acquisition targets and bring them to the big buyout firms.
More significantly, Romney’s firm wasn’t always looking for startups or troubled companies that it could turn around.
Private equity companies conduct a variety of transactions other than buying startups with growth potential or troubled firms ripe for a turnaround. Some seek out family-run operations under the theory that those typically have a lot of fat to cut. Some like “roll-ups,” buying up a bunch of small operations in one industry and combining them into a powerhouse with economies of scale. Firms buy divisions of large corporations that are trying to streamline their operations. Some acquisitions fit more than one of these descriptions. The constant is debt, and plenty of it. Private equity firms use such borrowed money to maximize their gains.
The Romney campaign says Bain did various types of deals. And it celebrates that Bain helped launch or rebuild some American corporate stalwarts, like Staples, Bright Horizons and Sports Authority.
Yet in addition, under Romney’s tenure, Bain often sought out solid businesses that didn’t need to be turned around. The reason: Such companies could operate under the burden of the enormous debt that Bain would layer on them.
“They always told us day one: They wanted profitable companies that are doing OK, and they pay what they needed to pay,” says Phillip Roman, who heads up an eponymous mergers and acquisitions firm that was involved in a legal dispute with Bain in the 1990s similar to McCall Springer’s. “There are companies that like turnarounds,” referring to other private equity firms. “That’s another business” from the one Bain was in.
Bain in the 1990s was “doing more [of] the usual leveraged buyout: Buy with a lot of debt, try to increase earnings and sell as soon as possible,” says Ludovic Phalippou, an expert on private equity at the University of Oxford in England. The firm was seeking “mature companies with high cash flow,” he says, with sufficiently stable earnings “to be able to leverage a lot.”