Friday, October 19, 2012

Is it too extreme to say Mitt Romney's business was fraud?

No it is not too extreme.  And you would hardly be among the first to say it.

Here is a class action lawsuit against Bain for fraud and unjust enrichment. Bain apparently schemed to avoid French legal regulations requiring it to assist downsized workers.  Bain sold a factory it wanted to close to a failing small business, apparently to get around French regulations on big business.  The complaint  was dismissed because the Statute of Limitations expired, not because it lacked merit.  Bain didn't want to pay for worker retraining, which shows the petty and devious mindset of these ideologues.

Granted that was 2007, after Romney "retired."

Let's back up  a year.  HCA  people accuse Bain Capital of price fixing.

Back up a few years.  More fraud.  Big Lots sold KB Toys to Bain in 2000, when Romney was still Bain chairman, accepting a note payable from Bain-KB.  KB took on debt and paid Bain off 2002, which left it unable to pay its note to Big Lots 2004.  Remember the parties involved here.  Big Lots thinks it sold KB Toys to Bain for money, but negligently allows Bain to structure a note promising their new KB acquisition will pay Big Lots the money promised, and Bain then sells its KB interest, clearing so much in fees that KB has no money and stiffs Big Lots, which means that Bain never paid Big Lots most of the money that it promised and walked away cash in hand after looting the company. Big Lots' lawsuit was dismissed because all such legal actions go through the bankruptcy court, which is why Bain was not formally convicted of fraud.

Bain, of course, had competitors. It neither invented nor perfected this bit of corporate chicanery.  Here a company called Caxton-Iseman does the same thing to Old Country Buffets.

But let us back up still more, to what happened to a company Romney himself managed.

Let's look look at the defense Romney's people have made of Dade International.  Mitt Romney managed this deal personally until he left for the Olympics. In 2002 Dade declared bankruptcy.  As part of the settlement, Bain Capital was cut out of any role because it was clear they caused the bankruptcy. At least 1,700 workers lost their jobs and 100 creditors and bond holders lost $900 million.

Romney defenders claim this deal was a big success because Dade went from being a company Bain Capital bought for $442 million in 1994 to one worth $7 billion when sold to Germany's Siemens in 2007 as reported in the pro-business, pro-GOP Forbes.

We aren't comparing apples to apples in Forbes' article or in the Romney claims.  Dade International was a medical testing division of Baxter Labs, sold off after the company experienced losses.  Baxter had losses because the U.S. government temporarily banned it from bidding on government work because the company had cooperated with an Arab boycott of Israel.  I'm sure Romney didn't highlight this deal, his deal to manage one of Baxter's business lines, in his talks with Benjamin Netanyahu.

Of course, a quick change in name to Dade International was necessary.

Dade had 4,000 employees and $625 million annual sales.  In 1995, under Romney management, they announced they were buying DuPont Medical Diagnostics with 1,800 people and $375 million annual sales for "an undisclosed sum."

In 1997 Bain under Romney merged Dade International with German company Hoechst Behring.  Hoechst Behring had 3,200 employees and $650 million in sales.,+Creating+a...-a019197868

So when they say Romney "grew" the business to $1.5 billion and 7.400 employees when Romney was in charge, what they mean is he took 3 businesses which independently had  $1.65 billion in annual sales and 9,000 employees and merged them to become one company with $1.5 billion in annual sales and 7,400 employees, furthermore favoring German products over the American product line, meaning it was the US that provided the layoffs.  Thus, during a time of explosive annual growth in medical diagnostic equipment markets and prices in the USA,  Mitt Romney managed to shrink 3 large medical diagnostic equipment companies. Dade International paid Romney $100 million dollars in management fees for that "service," more than covering Bain's $30 million investment, but not yet paying off Bain's loans.
In 1998, Bain Capital decided to cash out.  KKR offered $1.9 billion for the combined company, but the company did not like that price.  Bain made Dade borrow $420 million to pay off Bain and other investors who wanted to leave.  Dade could no longer meet its obligations with that debt and declared Chapter 11 bankruptcy a few years down the road (after Romney had left Bain Capital).  The 100 creditors and bondholders accused Bain Capital of "unjust enrichment," causing the bankruptcy judge to eliminate any Bain Capital claims from the settlement, which left the creditors who lent money to Dade for its expansion with a $900 million loss.  

When Siemens came in and paid $7 billion for Dade International, where was the company at?  Ah, it was at $1.7 billion in sales, barely more than pre-Bain Capital years, and 6,400 employees. Profits were around $200 million per year, which is probably about the same as all three major business that were part of Dade were earning in 1994.  That is to say it had the same level of sales it had in 1994, before Bain interfered, but employed 2,600 fewer people, but probably without making any more money.,+Creating+a...-a019197868

So why did Siemens pay so much for it?  Well Siemens paid $7 billion in cash for a company the market
only valued at $5 billion, and which had only been valued at $3.5 billion earlier that year.  Why would they do that? Siemens is a giant global competitor of General Electric.  GE had tried to buy Abbott Labs' similar medical diagnostics business for $8 billion. The deal fell through, but Siemens rushed to block GE's position by grabbing Dade.  In other words, it was GE and Abbott Labs whose merger talk created half the value for which Dade International was sold.  As for the rest of the $3.5 billion value, quite a healthy P/E ratio for $200 million in profit: we don't know what Bain paid for DuPont Diagnostics and what considerations were part of the Behringer deal, but we do know you can't compare Dade in 2007 to $442 million Dade  in 1994 without putting a value on DuPont and Behringer. Dade International was likely no more profitable in 2007 than its three independent businesses were in 1994, despite the magic of Mitt Romney and Bain.  1,700 employees who were downsized by Bain were worse off; as were any creditors who lent money to Dade, not realizing it would be stolen by Bain Capital, and if they couldn't stick around for the Siemens pay day.

There is no magic, still less any "management skill" in Mitt Romney.  Was it profitable to Bain? Yes. The $420 million payout to the ownership group didn't perhaps quite meet their $442 million initial investment, and since Bain borrowed most of its share, some interest as well; but the $100 million management fee covered all and then some. 

It is not too extreme to say the business of Bain Capital was destruction and deceit.  Bain's profits came directly from the workers it laid off and the lenders who had mistakenly lent to Dade in good faith.  Some of them probably made it back from Siemens, but that hardly makes Bain Capital a positive change agent.

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