The Real Romney (22 page)

Romney also came up with the idea of investing $5 million in a car parts company called Auto Palace/ADAP. Romney served on the board, and Bain lost about half of the investment. The boss’s poor track record on finding his own deals reinforced the view that Romney’s strength was analyzing other people’s proposals. He brought his characteristic grilling to hundreds of proposals over the years. During one of Bain Capital’s weekly business review meetings, one partner, Stephen Pagliuca, pitched the acquisition of the high-tech research firm Gartner Group. Romney went quickly to the heart of the matter: what did Gartner want to be? It was losing millions of dollars as a unit of the advertising firm Saatchi & Saatchi. Could it be a sustainable business? “Mitt was great at finding what the key issue on the deal was and then pressure testing it immediately,” Pagliuca said. “I’d lose a lot of sleep on those nights.” Gartner would go on to be one of Bain’s early big winners. After taking the company public, Bain eventually saw a 1,500 percent return on its investment, turning $3.5 million into $55 million. Over the years Gartner increased its workforce from about 700 to 4,400 employees.

Romney made up for his weaknesses by hiring—and paying well—partners who excelled in finding and closing deals. “I don’t think Mitt’s favorite thing in the world is the backroom negotiation of deals,” Stemberg, the Staples founder, said. “But one thing you’ve got to remember . . . Mitt Romney has always surrounded himself with great people who know how to execute his vision.” That would be a theme Romney would reprise as a politician. Faced with a problem, he would often suggest forming a committee, just as he had formed a partnership group, and let the experts hash it out while he listened and posed questions.

Occasionally, however, Romney showed he could make a deal happen. The most unlikely case occurred when he tried to buy Domino’s Pizza. Mark Nunnelly, the Bain Capital partner leading the deal, thought it might be helpful to bring Romney along to meet Domino’s Pizza CEO Tom Monaghan. After all, Domino’s was based in Ann Arbor, Michigan, and Romney was a son of a Michigan governor and had grown up in the state. Nunnelly figured Romney would be his secret weapon in wooing Monaghan. They flew to Michigan to meet with him. Monaghan, a staunch Catholic raised by nuns and a blunt character who had once owned the Detroit Tigers, promptly made clear his displeasure that Romney’s brother, Scott, was running against his favorite candidate for Michigan’s attorney general. The atmosphere turned cold. Monaghan asked Nunnelly if he had read his book,
Pizza Tiger
. Nunnelly had not. About forty-five minutes into what Nunnelly called a “dead meeting,” he figured it was a waste of an August day.

At that point Romney suddenly stood up. Eyeing a model car on Monaghan’s desk, he said, “I love ’57 Chevys,” switching to his car-guy persona. Almost immediately, the atmosphere warmed. For an hour and fifteen minutes, they talked about silver crankshafts, Detroit, and the car business. Nunnelly had to urge Romney to wrap it up or they’d miss their plane home. In the fall of 1998, Bain led a $1.1 billion buyout of the pizza chain, putting down about $385 million in cash and borrowing the rest. It outbid everyone else. As Bain took ownership, Romney later recalled, he thought about what he had just done. “We’re the biggest schmoes who said, ‘We’ll pay more than anybody else,’ ” he said. The “schmoes” apparently knew what they were doing. They took the company public in 2004, and Bain reaped more than $100 million in that first sale of stock, plus a $10 million fee for ending its management contract with Domino’s. Two Bain partners served on the board. Over time Bain sold all of its shares, earning a 500 percent return.

R
omney wasn’t one to socialize much with work colleagues. His ruthlessness with his personal time was meant to show how to balance work and family, but some partners who felt pressure from him to work eighty-hour weeks believed there was no way to follow the boss’s example. One partner left after his wife said he didn’t have enough time for his family. Another partner marveled at how different Romney was from most people in the stratosphere of the investment world. He didn’t go out for a beer, of course, but he also rarely went out with the guys in any social venue. He was all business or all family. One partner chalked it up to Romney’s introverted personality. Another called Romney “the Tin Man” for his inability to bond. He tried to compensate for his habit of social detachment by showing up at key moments, whether at the funeral of a young partner’s father or an important basketball game for another partner’s son.

One day in July 1996, Romney’s partner Bob Gay sent an urgent message. Gay’s fourteen-year-old daughter, Melissa, was missing. Romney went into high gear. “I don’t care how long it takes. We’re going to find her,” Romney said. He shut down the Boston office and sent fifty-six employees to New York City to help find Melissa. Another 250 people from Wall Street firms joined in. The quest became big news. “Investment Firm Shuts to Help Find Girl,” said a headline in
The Boston Globe.
The story reported that Romney and his partners had “decided that finding a missing daughter was more important than operating a $1 billion investment firm.” The Bain crew set up a distribution system for 200,000 brochures with Melissa’s picture, established a toll-free tip line, and hired private investigators.

The search took Romney onto the seediest streets of New York City. Soon Melissa’s image was distributed everywhere, but there was still no sign of her. Romney then arranged for Bob Gay to tell his story on a local news program. “Shortly thereafter, through a traced telephone call asking if there was a reward, my daughter was safely secured,” Gay said later. Melissa had taken a train from Connecticut without telling her parents she was going to a concert, and she was found later in the week at a house in New Jersey.

Romney later said that the search had changed his perspective on life. When Bain Capital ranked its annual accomplishments, the search for Melissa was number one. He said he would never forget talking with runaways in an effort to learn about Melissa’s whereabouts. “It was a shocker,” said Romney, who had rarely walked into the urban underbelly of America. “The number of lost souls was astounding.” The search had put Bain into the public eye in a way that was unusual for the private firm. Romney would heighten the profile even further when he first ran for president. Eleven years after Melissa was found, he authorized a campaign ad called “Searched,” which featured Bob Gay saying of his friend, “Mitt’s done a lot of things that people say are nearly impossible. But for me, the most important thing he’s ever done is to help save my daughter.” Romney, meanwhile, would say that the time spent searching for Melissa had been “more valuable than some financial home runs that made the front page of
The Wall Street Journal
. I mean, money is just money.”

T
he amount of money now being earned at Bain Capital was skyrocketing, and much of it came from a handful of giant deals. During Romney’s fifteen years there, the firm invested about $260 million in its ten top deals and reaped a nearly $3 billion return. That was about three-quarters of its overall profit on roughly one hundred transactions during Romney’s tenure. In one of his most specific explanations of how he made his fortune, Romney wrote in his autobiography,
Turnaround
, that he had not taken “the standard investment banker approach of snatching up companies with high, sustained growth, hanging on for six months, and then flipping them for a profit.” Instead, he wrote, “We were looking for troubled companies, businesses that were not performing as well as we think they could.” Romney said he or his partners would then “go to work to help management make their business more successful.” He wrote that most of the companies were ones that “no one has heard of—TRW’s credit services, the Yellow Pages of Italy.” Those weren’t just any two deals. They were two of the most lucrative of Romney’s career, and luck played a big part in both. One was a quick hit with a huge payout, and the other benefited unexpectedly from the Internet frenzy.

The first deal was for a credit-reporting service owned by the defense and aerospace company TRW. At first it seemed a mundane transaction, even though it was the biggest investment of Romney’s career, with Bain and its partners putting in about $100 million. Romney had little to do with the deal other than helping approve the investment. His partners included a savvy deal maker at another Boston private equity firm, Scott Sperling, of the Thomas H. Lee Company. The Bain and Lee groups had agreed to invest fifty-fifty and had taken preliminary control of the credit company spin-off, pending assurances that a fast new database system would be successful. They were thinking that they could make three times their money in about five years—a conservative return in their business.

With the newly named credit company Experian in hand, the Bain-Lee group was looking for other credit services to acquire, hoping to build a credit-reporting empire. One such inquiry went to a British company, Great Universal Stores, which was known for its Burberry chain but also had a credit unit. But it turned out that Great Universal didn’t want to sell its credit service; it wanted to build it into something bigger. So Great Universal came back to the Bain-Lee group with a surprising response: it wanted to buy Experian. The Bain and Lee partners were stunned. A mere seven weeks after buying it, Romney and his partners flipped the company. Bain’s $100 million investment returned at least $300 million.
The Wall Street Journal
, without mentioning Romney’s name, said the windfall would “go down as one of the quickest big hits in Wall Street history.” Romney personally pocketed millions of dollars. The profit margin and quick turnaround on the deal stunned investment houses around the world. Two of Romney’s associates used an identical phrase in describing how it turned out: it was like being “hit with the lucky stick.”

The second deal cited by Romney took longer but involved even more good timing and luck. It began with a renowned Italian investor named Phil Cuneo, who had the idea of buying the Italian version of the yellow pages. The companies that produced the bulky phone books were being bought and sold by investment houses around the world at the time. The deal was managed by Bain Capital partner Mark Nunnelly. It was unusual for Bain to invest in an Italian company, and Romney pressed Nunnelly. “Gee, Mark, are you sure?” he asked. “Gee, Mark, have you looked under every rock?” He was flapping his Hermès tie, mimicking a fast-beating heart; this one made him nervous.

Romney eventually agreed to the deal, and Bain Capital contributed $51.3 million. It seemed a solid investment in a firm with a staid and stable business model. But months after closing the deal, Cuneo and his Bain associates realized that they had acquired a company that might benefit from the surging interest in dot-com businesses. That had not been part of the original justification for the investment. “We stumbled on the Internet bubble,” Cuneo said. “We started seeing what was happening in the U.S.” Indeed, before long, they found they had bought a pot of gold. The yellow pages company owned a web-based directory that had the potential to be the Italian version of America Online or Yahoo! Romney was a well-known skeptic of Internet plays—correctly fearing that some would burst in an inevitable bubble—but this one seemed to have fallen into his lap at just the right time. The company, known by its acronym, SEAT, began to soar on the stock market, and Cuneo and Bain Capital began positioning it as “an Internet star.”

In just under three years, in September 2000, the partners sold the investment, earning a windfall that far exceeded anyone’s initial expectations. Bain’s $51.3 million investment in the Italian yellow pages returned at least $1.17 billion, according to a Romney associate familiar with the deal. There is no public documentation of the how the profits were distributed, but at that time at least 20 percent of the return would have gone to Bain Capital. Of that, Romney’s typical payout at the time was 5 to 10 percent. That means this one obscure deal would have given him a profit of $11 million to $22 million. If Romney made a side investment in the deal, as was standard among Bain partners, he would have made even larger gains. One Romney associate said Romney’s total profit could have been as much as $40 million. (A Romney spokesman did not respond to questions about the deal.) A Romney associate marveled that the deal “wasn’t like being hit by the lucky stick; it was being thrashed by it.”

It was those kinds of deals that enabled Bain Capital to report the highest returns in the business in the 1990s. That is why the firm, citing Romney’s track record, was able to raise its share of profits on deals to a stunning 30 percent—up from the industry standard of 20 percent—on top of its 2 percent up-front fee. Investors were willing to pay the higher share in the belief that Romney and his Bain team were worth it. Their history—averaging an 88 percent annual return over the fifteen years—said they were. “The returns were just eye-popping, and Bain Capital was able to command a premium,” former Bain Capital partner Geoffrey Rehnert said. Romney himself would sometimes boast as well, comparing the Bain results with the 3 to 4 percent payout of “passbook” savings accounts. Not many of Bain’s customers carried passbooks, of course; the minimum stake for investors was generally $1 million.

Romney’s own wealth had increased exponentially. His net worth would grow to at least $250 million, and maybe much more, a trove that would enable him to foot a large part of the bill for his 2008 presidential campaign. Asked about a report that his wealth at one point reached as high as $1 billion, Romney said, “I’m not going to get into my net worth. No estimates whatsoever.” The extent of Romney’s personal take was helped by a favorable tax rate. Most of Romney’s income came from capital gains at the Bain funds, not from salary. Under federal tax law, capital gains are taxed at a much lower rate than regular income. In 1999, when Romney stepped down as the head of Bain Capital, the top tax rate for income was 39.6 percent, while the top rate for capital gains was about half that, at 20 percent. This differential meant that Romney, like most high earners, was paying a lower tax rate on most of his earnings than some of the lowest-level workers at his firm and many working-class Americans.