The Real Romney (19 page)

Now the question was where to invest. Romney dispatched his new partners to study potential deals of the two types prevalent in the market: buyouts, which involved purchasing existing companies, and venture capital investments in younger businesses that had yet to take off. In the early 1980s, venture capital was a niche field, dominated by Wall Street financiers backing high-tech companies. It could take years for such infant concerns to become profitable; payoffs were unpredictable, but winners could be bonanzas. Juggernauts such as Apple Computer had started with venture funding in the 1970s, and companies such as Cisco Systems were taking off in the 1980s. But Romney and his partners were loath to do battle in high tech, where they didn’t feel they had an edge. “We thought we’d lose if we tried to invest in technology-based start-ups,” Bekenstein said.

Romney was, by nature, deeply risk averse in a business based on risk. He worried about losing the money of his partners and his outside investors—not to mention his own savings. “He was troubled when we didn’t invest fast enough, he was troubled when we made an investment,” Andrews said. “He never wanted to fall short on commitments or representations made to investors.” So rather than jump boldly into new fields, he focused his attention on more mundane corners of the economy: makers of wheel rims, photo albums, and handbags, to cite three examples. Sorting through possible investments, Romney met weekly with his young partners, pushing them for deeper analysis and more data and giving himself the final vote on whether to go forward. They operated more like a group of bankers carefully guarding their cash than an aggressive firm eager to embrace giant deals. Tellingly, Romney called the group that reviewed deals the credit committee, instead of the investment committee (the usual term), and his banker’s jargon stuck. Perhaps the caution came from his family background. Generations of boom and bust had lifted the fortunes of his ancestors and then impoverished them until his father, George, had made it big. And even George had staked his reputation on being liberal on social issues but conservative with other people’s money. Wherever the impulse came from, Romney was so relentless in playing the role of devil’s advocate that his partner Bob White would joke about wanting to “punch him in the nose.”

Some partners suspected that Romney always had one eye on his political future. “I always wondered about Mitt, whether he was concerned about the blemishes from a business perspective or from a personal and political perspective,” one partner said years later. The partner concluded that it was the latter. Whereas most entrepreneurs accepted failure as an inherent part of the game, the partner said, Romney worried that a single flop would bring disgrace. Every calculation had to be made with care.

One winter evening in 1985, Romney sat in a drab ten-by-ten-foot conference room in Bain Capital’s office, flapping his tie to mimic a rapidly beating heart. His colleagues knew that when Romney flapped his tie, he was feeling pressure. At the time, he was so worried about Bain Capital’s future that, according to one colleague, he raised the possibility of returning the millions they had received from investors and going back to their old jobs. Dressed in a crisp blue shirt with a white collar and gold collar pin, Romney appeared to be the model of a successful 1980s financier. But his shirt, according to his former colleague Geoffrey Rehnert, was drenched dark with sweat under his arms. “Mitt was struggling,” Rehnert said. “And he wasn’t used to struggling.”

Romney and his partners, in avoiding high tech, had taken on some challenging, if obscure, investments. One of Bain Capital’s first deals was the $2 million it put into Key Airlines in 1984. Key ran shuttle routes from Las Vegas deep into the Nevada desert, used mainly by government personnel. Bain wanted to expand the operation and added contract flights for tourism to places like Mexico and the Caribbean. Two years later, Bain merged Key with a start-up airline, Presidential Airways, which went public, and Bain ultimately more than doubled its investment, to $5.4 million. (The company’s fortunes did not last; Presidential went bankrupt in 1989.) Another early deal was MediVision, which ran surgical centers for outpatient eye surgery. An effort to expand by building centers around the country was slow, but buying facilities worked out better, and the company was ultimately packaged with a medical supply start-up and sold to a larger firm at a profit. Holson Burnes, a company that made photo accessories, also struggled. Bain had bought the photo album maker in 1986 and after a few tough years had merged it with a frame maker, but the combination didn’t immediately pay off. There were cost cuts, including layoffs, and product problems. An analog version of a digital photo frame—a contraption that, with a press of a button, would flip from one photo in a stack to the next—didn’t work well at first. It wasn’t until 1992 that Bain would take the company public—well beyond Bain’s goal of a three-to-five-year investment—and ultimately double its money on the $10 million investment.

Despite the struggles, 1986 would prove to be a pivotal year for Romney. It started with a most unlikely deal. A former supermarket executive, Thomas Stemberg, was trying to sell venture capitalists on what seemed like a modest idea: a cheaper way to sell paper clips, pens, and other office supplies. The enterprise that would become the superstore Staples at first met with skepticism. Small and midsize businesses at the time bought most of their supplies from local stationers, often at significant markups. Few people saw the profit margin potential in selling such homely goods at discount and in massive volume. But Stemberg was convinced and hired an investment banker to help raise money. Romney eventually heard Stemberg’s pitch, and he and his partners dug into Stemberg’s projections. They called lawyers, accountants, and scores of business owners in the Boston area to query them on how much they spent on supplies and whether they’d be willing to shop at a large new store. The partners initially concluded that Stemberg was overestimating the market. “Look,” Stemberg told Romney, “your mistake is that the guys you called think they know what they spend, but they don’t.” Romney and Bain Capital went back to the businesses and tallied up invoices. Stemberg’s assessment that this was a hidden giant of a market seemed right after all.

Romney hadn’t stumbled on Staples on his own. A partner at another Boston firm, Bessemer Venture Partners, had invited him to the first meeting with Stemberg. But after that, Romney took the lead; he finally had his hands on what looked like a promising start-up. Bain Capital invested $650,000 to help Staples open its first store in Brighton, Massachusetts, in May 1986. In all, it invested about $2.5 million in the company. Three years later, in 1989, Staples sold shares to the public, when it was just barely turning a profit, and Bain reaped more than $13 million. It was a big success at the time. Yet it was very modest compared with later Bain deals that reached into the hundreds of millions of dollars.

For years Romney would cite the Staples investment as proof that he had helped create thousands of jobs. And it is true that his foresight in investing in Staples helped a major enterprise lift off. But neither Romney nor Bain directly ran the business, though Romney was active on its board. At the initial public offering, Staples was a firm of 24 stores and 1,100 full- and part-time jobs. Its boom years were still to come. Romney resigned his seat on the board of directors in 2001 in preparation for his run for governor. A decade later, the company had more than 2,200 stores and 89,000 employees.

Assessing claims about job creation is hard. Staples grew hugely, of course, but the gains were offset, at least partially, by losses elsewhere: smaller, mom-and-pop stationery stores and suppliers were being squeezed, and some went out of business entirely. Ultimately, Romney would approvingly call Staples “a classic ‘category killer,’ like Toys ‘R’ Us.” Staples steamrollered the competition, undercutting prices and selling in large quantities. When asked during the 1994 Senate campaign about his job creation claim—that he had helped create ten thousand jobs at various companies (a claim he expanded during his 2012 presidential campaign to having “helped to create tens of thousands” of jobs)—Romney responded with a careful hedge. He emphasized that he always used the word “helped” and didn’t take full credit for the jobs. “That’s why I’m always very careful to use the words ‘help create,’ ” he acknowledged. “Bain Capital, or Mitt Romney, ‘helped create’ over 10,000 jobs. I don’t take credit for the jobs at Staples. I helped create the jobs at Staples.”

Howard Anderson, a professor at MIT’s Sloan School of Management and a former entrepreneur who has invested with Bain, put it more plainly: “What you really cannot do is claim every job was because of your good judgment,” he said. “You’re not really running those organizations. You’re financing it, you’re offering your judgment and your advice. I think you can only really claim credit for the jobs of the company that you ran.” Stemberg, however, begrudges Romney nothing. If Romney gets the blame for jobs lost on Bain Capital’s watch, he said, “Why not give him credit for every job ever created at Staples? One could argue that he was instrumental in Staples both getting started and, more importantly, being successful. It goes both ways.”

T
he same year Romney invested in Staples—digging into a true start-up—he also inked the biggest transaction, by far, that Bain Capital had put together up till then. And with this $200 million deal, he waded fully into the high-stakes financial arena of the time: leveraged buyouts, or LBOs. Whereas a venture capital deal bet on a new business, pursuing an LBO meant borrowing huge sums of money to buy an established company, typically saddling the target with big debts. The goal was to mine value that others had missed, to quickly improve profitability by cutting costs and often jobs, and then to sell. Romney thought he and his team could add to that equation by making management and operational changes to grow the company’s business. Romney would later acknowledge the shift in his thinking about whether to stress venture capital investments or LBOs. Initially, he thought that putting money into young firms “would be just as good as acquiring an existing company and trying to make it better.” But he found that “there’s a lot greater risk in a start-up than there is in acquiring an existing company.” He was unnerved by the prospect of investing money when “the success of the enterprise depended upon something that was out of our control, such as ‘Could Dr. X make the technology work?’ or would the market develop in the future that had not yet come to fruition?”

He was much more comfortable in an environment where the issue wasn’t whether an idea would pan out but whether the numbers worked. He knew himself, knew that his powers ran less to the creative than to the analytical; he was not at heart an entrepreneur. Perhaps that was what led him to push the pause button at the outset with Bill Bain. But he now felt ready to take on much bigger financial risks, mostly by making leveraged bets on existing companies, whose market was known and which had business plans he could parse and master.

Romney found an ideal target in the auto industry, a field he knew well from his Michigan upbringing. It was a wheel-rim maker for trucks called Accuride, part of the empire of tire giant Firestone. There was no “Dr. X” factor to fear here. The wheel-rim business was as unsexy, and as solid, as it got. Firestone wanted to sell the Kentucky-based business because it wasn’t part of its major product line. Bain told management and unions that current employees would not be laid off, a pledge the firm did not repeat in many other deals. Bain vowed to grow the business by making substantial changes, from revamping production and giving executives greater pay incentives to offering discounts to customers who agreed to give Accuride all their business. That was part of what one Romney colleague at Bain & Company called the “loyalty effect,” giving employees, customers, and investors incentives to make a company successful.

Ultimately, Bain won the bidding for Accuride with a $200 million offer, an offer that was highly leveraged. Romney put just $5 million of Bain’s money at risk; the rest was borrowed from banks, and, as was typical in a buyout, Accuride would be responsible for repayment. It was like buying a house with 1 percent down and someone else on the hook for the mortgage. No wonder the LBO business was alluring. The only catch was that the value of the business—the house—had to go up to make it all work. Accuride did, and the bet paid off handsomely for both Bain and the wheel-rim maker. The company’s earnings rose by 20 percent in the first year on Bain’s watch, and the number of plant jobs increased by 16 percent, to 1,785. Eighteen months later, Bain sold Accuride to the mining conglomerate Phelps Dodge Corp., turning its $5 million into $121 million. This was its first big LBO hit.

Romney couldn’t have predicted how successful the Accuride deal would be. But his decision to try to pull it off put Bain Capital on the map. Bain’s partners believed they had joined the big time, even before the profits were in, and felt ready to celebrate. Romney, famous for being tightfisted (and not a drinker), was not the sort to host the kind of champagne-soaked party typical of buyout firms in the 1980s; he ran a spartan operation. Rehnert recalled being among the first at Bain to have a cell phone in his car. Romney was aghast, asking why he was wasting money on the device, which at the time was unwieldy and unreliable. Why not wait to use a landline or stop at a pay phone? he asked. Rehnert also recalled going with Romney to Au Bon Pain, a fast-food restaurant. Romney got his lunch and began carefully counting his change. Rehnert said he asked him why he bothered. “I throw mine in the fountain over there,” he told Romney. Romney looked stunned, even “viscerally pained,” not realizing his colleague was joking. But Romney did have a fondness for fine meals at fancy restaurants. So on the night the Accuride deal was sealed, Romney took his partners to L’Espalier, one of Boston’s finest French restaurants. The crew left behind their mishmash of metal desks and dined on haute cuisine
,
celebrating what they considered a great success after the ups and downs of the firm’s first two years.