Saturday, June 23, 2012

Typical Private Equity

I saw this ad over at Balloon Juice:




While I think some of the evil Bain Capital stuff is overdone on the left, I was curious about the details of this ad. When I did the google search, I got this from the Mitt Romney website

OBAMA MYTH: Shutting down a successful paper plant in Marion, IN.

REALITY: The paper plant in Marion, IN was losing money when Ampad bought it to try to turn it around.
In 1992, Bain Capital invested in American Paper & Pad, or Ampad.  Two years later – while Governor Romney was on a leave of absence to run for U.S. Senate against the late Ted Kennedy – Ampad purchased the assets of an unprofitable plant in Marion, Indiana from Smith Corona.
This was not a healthy plant: In the year preceding Ampad’s purchase, the Marion plant lost more than $1.6 million dollars.
Though the Marion plant would later close, Ampad added nearly 2,500 jobs at other plants between Bain Capital’s initial investment and the sale of its majority interest.  During this same period, revenues grew dramatically from $8.8 million to more than $580 million.
There were two things I thought were odd about this.  First, a plant losing more than $1.6 million dollars, while not good, doesn't mean very much.  The plant I work at may lose almost $1 million this year, according to the accountants.  Second, revenues grew from $8.8 million to $580 million?  That couldn't be organic growth.  Next stop on google gives me this:

  
 
In 1992, Bain Capital acquired American Pad & Paper, or Ampad, from Mead Corp., embarking on a ''roll-up strategy'' in which a firm buys up similar companies in the same industry in order to expand revenues and cut costs.
Through Ampad, Bain bought several other office supply makers, borrowing heavily each time. By 1999, Ampad's debt reached nearly $400 million, up from $11 million in 1993, according to government filings.
Sales grew, too - for a while. But by the late 1990s, foreign competition and increased buying power by superstores like Bain-funded Staples sliced Ampad's revenues.
The result: Ampad couldn't pay its debts and plunged into bankruptcy. Workers lost jobs and stockholders were left with worthless shares.
Bain Capital, however, made money - and lots of it. The firm put just $5 million into the deal, but realized big returns in short order. In 1995, several months after shuttering a plant in Indiana and firing roughly 200 workers, Bain Capital borrowed more money to have Ampad buy yet another company, and pay Bain and its investors more than $60 million - in addition to fees for arranging the deal.
Bain Capital took millions more out of Ampad by charging it $2 million a year in management fees, plus additional fees for each Ampad acquisition. In 1995 alone, Ampad paid Bain at least $7 million. The next year, when Ampad began selling shares on public stock exchanges, Bain Capital grabbed another $2 million fee for arranging the initial public offering - on top of the $45 million to $50 million Bain reaped by selling some of its shares.
Bain Capital didn't escape Ampad's eventual bankruptcy unscathed. It held about one-third of Ampad's shares, which became worthless. But while as many as 185 workers near Buffalo lost jobs in a 1999 plant closing, Bain Capital and its investors ultimately made more than $100 million on the deal.
The whole deal with private equity is to buy struggling companies, load the company up with debt, make some acquisitions to give opportunities for cost reduction and to pad top line numbers, charge big management fees, have the company pay back whatever investment you made in the company, then take the company public and find the bigger suckers.  Lather. Rinse. Repeat.  That part is very appropriate, because after all that, one should feel pretty dirty.  This is a pure extraction play.  Strip everything you can out of a company, then dump it on some unsuspecting fool.  Absolute Robber Baron stuff.

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