Finders Weepers: Early Bain Disputes Cast New Light on Its Business

Posted on Sep 10, 2012

By Jesse Eisinger, ProPublica

(Page 2)

Financial data on many of Bain’s acquisitions are not available, since they were private transactions. But there are several examples of companies that Bain took over that were established and seem to have had enough revenue to support leverage. Bain and another firm bought what they would name Masland Holdings, a maker of automobile carpeting and insulation, from Burlington Industries in 1991. Masland had $305 million in sales that year, according to Dun & Bradstreet. The firms took it public in 1993. Duane Reade was a successful family-run business with revenue of $225 million when Bain bought it in 1992, according to the Wall Street Journal, and sold it five years later.

Early on, in 1986, Bain formed Accuride to purchase the wheel-making division of Firestone Tire & Rubber, with some executives from the company. Bain structured the deal to have 40-to-1 leverage, according to the Los Angeles Times, meaning Bain and its co-investors put an enormous amount of debt on Accuride for every dollar they invested. Accuride had sales of $215 million in its fiscal 1986, according to the Wall Street Journal. Accuride was sold within a year and a half, earning Bain more than 20 times its original investment, according to the Times. (Bain revamped production and restructured executive compensation at the company, according to a case study by a Bain partner, cited by the Boston Globe.) 

“I didn’t want to invest in start-ups where the success of the enterprise depended upon something that was out of our control,” Romney was quoted as saying in the Boston Globe in 2007. 

The Wall Street Journal found that many of the businesses Bain bought went bust, even when Bain reaped big financial wins. The paper analyzed 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, finding that 22 percent either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested. An additional 8 percent ran into so much trouble that all of the money Bain invested was lost. But overall, the hits more than made up for the losses, and Bain recorded 50 percent to 80 percent annual gains in the period, the paper found.

For a private equity firm, choosing the right company to buy is critical, which is where firms such as McCall Springer came in. 

In February 1996, Springer, who runs a small investment firm in Los Angeles, woke up to press accounts that Bain and another Boston-based private-equity company, Thomas H. Lee & Co., were in talks to acquire the business that today is known as Experian. Alarmed, he fired off a letter to Adam Kirsch, a managing director of Bain Capital. “As you are aware,” Springer wrote on Feb. 9, 1996, his firm “brought each of you the idea and reasons for acquiring TRW ISS/REDI,” as Experian was then called. 

“We provided you detailed business and strategic plans, company organization and cost structures, management tendencies and requirements, competitive and customer market investigations, emerging market opportunities, new or improved product and service opportunities,” Springer wrote in a letter that is an exhibit in a legal fight from that time.

Springer followed up that on Feb. 12, with a second letter to top officials of Bain and Thomas H. Lee. The top addressee: Mitt Romney.

Springer reminded Bain, as well as others involved in the deal, that McCall Springer had written agreements with each party, which he claimed acknowledged that Springer had brought the idea to them a couple of years earlier. 

Instead of paying up, Bain brought legal action against McCall Springer. Romney’s private equity firm sought a declaratory judgment, a legal strategy to seek a quick resolution of a matter, often in a jurisdiction of your choosing. McCall Springer countersued, alleging it was owed equity and management rights in the deal and seeking punitive damages. In the end, Bain entered into an undisclosed settlement.

 

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