Till Birnam forest come to Dunsinane.
In 1992, Bain Capital bought American Pad & Paper by financing 87 percent of the purchase price. In the next three years, Ampad borrowed to make acquisitions, repay existing debt and pay Bain Capital and its investors $60 million in dividends.Note that the success of this business strategy depends entirely on the Goverment having its thumb on the scale. The government made corporate debt tax deductible so Bain could make Ampad borrow money to pay Bain fees and then use tax deductions to make debt payments. The Government decided that Bain's earnings would be taxed as capital gains (15%) and passed on to Bain's investors as "carried interest". The Government, through the Courts, decided that the bankruptcy laws should be reinterpreted so that management could take money out of the company for its own benefit while putting creditors at risk and not suffer criminal or civil penalties when the company failed. If a small business pulled this kind of "conveyance" of corporate funds for the benefit of company management, the owners would go to jail, but our Federal bankruptcy courts have decided that such considerations don't apply when the take is in the tens or hundreds of millions or more. And here's the conclusion of the author of the paragraph I started with - he's a
As a result, the company’s debt swelled from $11 million in 1993 to $444 million by 1995. The $14 million in annual interest expense on this debt dwarfed the company’s $4.7 million operating cash flow. The proceeds of an initial public offering in July 1996 were used to pay Bain Capital $48 million for part of its stake and to reduce the company’s debt to $270 million.
From 1993 to 1999, Bain Capital charged Ampad about $18 million in various fees. By 1999, the company’s debt was back up to $400 million. Unable to pay the interest costs and drained of cash paid to Bain Capital in fees and dividends, Ampad filed for bankruptcy the following year. Senior secured lenders got less than 50 cents on the dollar, unsecured lenders received two- tenths of a cent on the dollar, and several hundred jobs were lost. Bain Capital had reaped capital gains of $107 million on its $5.1 million investment. [cite]
Success, entrepreneurship, risk taking and wealth creation deserve to be celebrated when they are the result of fair play and hard work. President Barack Obama is correct in distinguishing the patient creation of value for the benefit of investors through genuine operational improvements and growth -- the true mission of private equity -- from the form of rigged capitalism that was practiced by some in the industry in the past when debt was cheap and plentiful.Let's look at another Bain deal from the point of view of a securities lawyer
Okay — now, let’s review some anceint Bain Capital history: In December 1994, Mr. Romney conducted his largest transaction to date, with his newly formed Bain Capital entity: he bought Dade International a sleepy medical diagnostics equipment company — largely with borrowed money from banks, and $40 million in cash — from a diversified public health care company. Then, over the years, at what eventually became Dade-Behring, Mr. Romney and his team acquired several other diagnostics-related companies and business lines. Much of that went well, from an operations and financial results point of view. Then came 1999. In one fell swoop, Mr. Romney and his team devised a cash-out recap plan for Dade-Behring. The end result was that Dade was drained of at least $260 million of capital by Bain Capital, and Goldman related parties, on April 14, 1999 — while Mr. Romney was still in charge, at Bain Capital — by his own admission.The whole point of Bain was to use the advantages of controlling a lot of cash, and the advantages of Federal tax law subsidies, and the advantages of a Court system that favored well-papered transactions to pump, loot, and walk away.
It now appears Mr. Romeny was still listing his “principal occupation” with the SEC as running Bain Capital, even when — in December 2000 — Dade violated its debt covenants, and later defaulted on the bank debt it had incurred to pay Bain the $260 million recap funds.
By September 14, 2001, the Dade bank Noteholders had formed a committee to file bankruptcy, along with the consent of Bain Capital, for Dade. That bankruptcy cost the all the public shareholders and preferred shareholders their entire investment(s), and resulted in the layoffs of over 1,700 people not long thereafter. None of it would have occured if Mr. Romney and Bain Capital wouldn’t have gutted the company of cash, to pay themselves perhaps $260 million. That number approached $450 million, when all the fees and other transactions over the years were totaled up. [cite]