#PRIVATEEQUITY IS GOOD FOR EMPLOYEES AND AMERICA/ THE REAL REVOBain Capitol was a private equity firm that specialized in depressed assets. That makes sense. You can’t really make money buying a business unless you bring some improvement to the table. If you attempt to buy a profitable business and run it just like the previous owners did, it is just about impossible to get any kind of return on investment. The sellers will want the productivity of the business baked into in the selling price. That leaves little opportunity for the buyer. No, to buy a business and make money, you have to improve the business.
Some companies acquire businesses and merge them into other businesses and take advantage of economies of scale. Others will bring some new expertise or energy to a business and expand its operations. Probably the most common type of private equity acquisition, however, is the acquisition of depressed assets.
Depressed assets are businesses that are in trouble. These are businesses that, without and infusion of capital and expertise, are going to go under. These sort of businesses represent an opportunity for private equity. Since the sale price of a failing business is low, a buyer who can turn the business around and make it profitable will see a huge upside. If they can’t save the business, however, there is still an opportunity to make a little money liquidating its assets.
So turn-around private equity firms look for depressed assets to acquire in the hopes of making the assets profitable. If they are successful, they make a hell of a lot of money. If they fail, they will go to the fallback position and sell off the assets at auction and make whatever they can.
So along comes Romney and Bain and finds a steel mill in bad shape. Without an infusion of capital, it will go belly up. They do their due diligence and acquire the business and work to turn it around. It turns out, however, that they couldn’t get it done. First, the entire steel industry is increasingly depressed due to foreign competition and reduced demand. Secondly, the union at the plant has gone on a long, harsh strike. By the time the strike is over, cash is gone, sales aren’t forthcoming and the business is no longer viable. No one is willing to risk more capital on the firm.
Bain has to tell its investors that it failed to turn around the business. They go about salvaging what they can of the investment by selling off the assets. They end up making a fair, but far less than planned, return on the investment. They move on.
The workers are out of jobs and bitter as all hell. They blame Bain and Romney. Of course if Bain or some other private equity firm hadn’t injected capital into their business, the plant would have been shuttered and they would have been laid off three years earlier. Bain didn’t acquire a healthy business. They took a chance on a failing business. Market conditions and labor issues kept them from saving it. They did, however, extend the life of the business.
Some of the workers are bitter because Bain made money anyway. Of course the workers also made money during those three additional years of employment, but they don’t take that into consideration. Bain is like a vulture, they say, picking the flesh from the bones of the bankrupt business.
But what is Bain supposed to do? It has the remains of an asset and it needs to liquidate it. They aren’t going to leave the machine tools and property to rot, so of course they sell them. They are legally obligated to do that on behalf of their investors. An auction sale after the farm goes belly up isn’t unexpected. Investors and lenders expect to get what they can from their investment.
Some have suggested that, if a private equity firm fails to turn a business around, it shouldn’t be allowed to make money on the remains. This sort of rule, of course, would have increased the risk for the equity firm on the front end and, as a result, many wouldn’t invest in depressed assets at all. Again, with out the private equity liquidity injection, the mill would have gone under three years earlier. Rules that say that owners of businesses can’t liquidate their assets just mean that there will be few who are willing to even risk a shot at turning around failing businesses. This is not to the benefit of employees.
The response of employees and their sympathizers was very Pavlovian. They felt pain, looked up and saw Romney and Bain and assumed they were the cause of their pain. It is understandable. That doesn’t make it right. The family of an old and very sickly man who collapses in the street shouldn’t blame his death on the paramedic who applied CPR but failed to revive him. Nor should they call for the paramedic to receive no pay for his day’s work.
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