Guaranteed profits

By DAVID S. BERNSTEIN  |  August 8, 2007

Rewriting Staples history. By David S. Bernstein

Mitt's equity army: Romney’s war chest is overflowing with the contributions of his financial-world pals. But what is the price of their loyalty? By David S. Bernstein

Employees of Bain Capital are doing much to help their former boss’s presidential prospects. They have done very well by investing in the company’s funds, which have generally provided terrific returns. But Romney, who leaves little to chance, took additional measures to ensure that he and his colleagues made money off of their deals.

One way they did this was through aggressive stock-compensation plans for key executives and directors at Bain-owned companies — usually including several current and former Bain Capital employees, as is common in private-equity deals.

Another was by using certain companies they controlled to boost the value of others — a practice that Bain Capital helped pioneer. Often, this meant getting Bain’s large, well-known companies to give their business to Bain’s unknown start-ups — a crucial step to a new company’s success. For example, Jenzabar, a Bain-funded Internet start-up of the late ’90s, got several of its first contracts at Bain-owned companies. The portfolio of companies controlled by Bain Capital — as many as 200 during Romney’s years in charge, from 1984 through 2001 — provides plenty of cross-company synergistic opportunities. The firm frankly boasts of this in some of its marketing materials.

Not long after Bain Capital bought American Pad & Paper (AmPad) in 1992, AmPad landed a huge contract with Staples, where Romney was a director. By 1996, according to an industry analysis at the time, Staples accounted for more than 10 percent of AmPad’s entire annual sales.

Two years after buying mattress-maker Sealy in 1997, Bain Capital bought two of North America’s largest mattress-retail chains, Mattress Discounter and Sleep Country Canada, to help boost Sealy’s sales. Other examples abound.

This practice helps Bain, but not necessarily the investors or employees of the individual companies, which may be sacrificing their best interests for those of other Bain Capital companies. One Bain-owned company’s 1997 prospectus even warned that Bain Capital would maintain control of the board of directors after the initial public offering, and that “there can be no assurance that conflicts of interest will not arise with respect to such Directors or that such conflicts will be resolved in a manner favorable to the Company.” In other words: your investment will be in the hands of people who might sacrifice it for a gain in a company you don’t own.

In almost all of Bain Capital’s leveraged buyouts, something else always came above the best interests of the company: a substantial contract with Bain Capital for consulting services — a contract sometimes worth more than Bain was investing in the first place.

When Bain Capital put up about $6.5 million in cash (and another $41 million in borrowed funds) to buy contact-lens maker Wesley-Jessen in 1995, it inked an “Advisory Agreement” for Bain’s management-consulting services. That deal paid Bain Capital more than $4 million in the 15 months between that purchase and the initial public offering (IPO), plus a $10 million buy-out of the remaining years of the contract when the IPO went through — after which the Bain-controlled board immediately inked a new guaranteed 10-year contract, paying Bain a minimum of $2 million dollars a year.

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