Romney’s mentor, Bill Bain, and his former firm were in deep trouble. Bain and the seven other founders had come up with a plan to cash out part of their ownership stakes. To do so, they had Bain & Company take out more than $200 million in loans. The idea was to give the founders a large payout and provide partners with a substantial stake in the company. But the result was that a mountain of debt was piled on the firm at exactly the wrong time. The economy was slowing, the company’s revenues were declining, and banks were failing. It was the ultimate embarrassment: here was a company that prided itself on advising others how to prudently improve their businesses, and it was facing near-disaster by failing to follow some of the very principles it preached. Within the firm, partners saw their own earning potential slashed—all in the name of enriching the founders. The company’s existence was at risk.
The senior partners saw Romney as the best person to deal with the crisis: he had the trust of Bill Bain but had not been part of the founder group whose plan had caused all the trouble. They needed someone who could wring concessions from creditors and keep the firm together. A group of the partners went to Romney with a stark message. The consulting company was “going over a cliff,” they told him. “We need you to come in and run the organization.” Though it had been seven years since Romney had left Bain & Company, he realized that his own fate was at stake. If Bain & Company went bankrupt, it could cast such a shadow that his own Bain Capital might also collapse. Bill Bain agreed to let Romney take charge.
Once he saw the books, Romney realized that the problems were even greater than he had imagined. On the day in 1991 he took control, layoffs began. Eventually, 260 people around the world, 18 percent of the Bain & Company workforce, would lose their jobs. The salaries and benefits of many remaining employees were slashed. But that wasn’t nearly enough. Romney learned that the company had just sent a $1 million check to one of Bain & Company’s landlords. “We have bad news,” Romney’s message to the landlord said. “The check has been sent but it’s not going to clear because we’ve cancelled payment.” Romney canceled many other checks for rent payments, real estate, and to “all sorts of suppliers,” doing whatever he could to meet the payroll. Romney’s worry was not just about the financial ledger at Bain & Company. He worried that some company executives would be subject to prosecution. The Massachusetts legal code calls for up to a year in prison for a company official who willfully violates wage law. “It’s a crime in this state to employ someone knowing or having reason to know that you won’t be able to pay them at the end of the pay period,” Romney later told the conservative radio talk-show host and writer Hugh Hewitt. “It’s a crime and we were perilously close to not being able to meet payroll. So, we watched this like a hawk.” There were, he said, “some really frightening months.”
Romney pitted creditors against one another and beseeched banks to go easy on loan repayments, or everyone would lose. At one point, on a Saturday in Bain Capital’s office, Romney and a couple of his partners met with a banker from Goldman Sachs to try to persuade the Wall Street giant to help restructure the consulting firm’s debt. The banker, known for his sharp-elbowed style in his dealings with troubled companies, sat across the table from Romney. The discussion grew increasingly heated. As Romney made his pitch, the Goldman banker said, “Shut up,” and told him that Bain & Company’s best hope was to file for bankruptcy protection, according to a Bain partner. Romney rose to his feet, and the other partners in the room thought he might launch across the table and hit the banker; they had rarely seen him so angry.
As far as Romney was concerned, bankruptcy was not an option. He would embrace that idea when it came to reorganizing other failing companies, given his belief in the creative destruction of capitalism. But if Bain & Company went bankrupt, hundreds of jobs would be lost and Romney’s effort would be seen as a failure. That left him to deal with a cascade of troubles: checks were at risk of bouncing, loans couldn’t be paid, and bankers were balking at Romney’s plan. He began demanding concessions from almost everyone owed something by Bain & Company. He convinced the Federal Deposit Insurance Corporation, which insures bank deposits, to forgive roughly $10 million of $38 million in loans owed to the failed Bank of New England. Several major lenders agreed to take 80 cents on the dollar rather than risk default. If Romney hadn’t come up with the rescue plan, his aides later said, the losses to the FDIC and other institutions would have been much greater.
He was toughest when it came to negotiating with the partners at Bain & Company. He told the founding partners they had to give up about $100 million, or half the money they’d been planning to take out of the firm. “He was willing to make very tough decisions that had to be made and force them on people,” said former Bain & Company partner Harry Strachan. Then, one autumn Saturday, Romney summoned about forty partners from Bain & Company to an urgent meeting. He had a take-it-or-leave-it offer: agree to pay cuts and promise to stay with the company for a year, and he would do everything he could to fix the firm. If everyone stayed at a lower salary but joined together, he felt confident that revenues would rebound and they would soon be earning more than ever. Romney said he would leave the room for thirty minutes to let the partners think about it. He knew that many could easily go to other firms for higher pay. He told the partners that anyone who rejected his plan should leave before he returned to the room. Only one person left.
Much of what Romney did to save the company was never made public. But in the end the breaks on loans, the layoffs, financial concessions from partners, and other measures helped Bain & Company save enough money to stay afloat and eventually thrive again. It was the very definition of the kind of “turnaround” for which Romney would claim expertise. Given the embarrassing circumstances of how the company nearly failed, the story of the rescue of Bain & Company has not fit neatly into Romney’s campaign narrative. But it was one of his most impressive displays of executive talent and toughness; in some ways, it was his finest hour at Bain. “If Bain & Company went bankrupt, nobody would ever have taken us seriously,” former Bain Capital partner Geoffrey Rehnert said. “They would’ve been known as the clowns who charged a lot in consulting fees and went bankrupt.”
Shortly after Romney returned to full-time work at Bain Capital, he faced a new crisis that tested his toughened management skills. He was serving on the board of Damon Corp., a medical testing firm based in Needham, Massachusetts, as a result of a $4 million Bain Capital investment he had approved back in 1989. Bain Capital held an 8 percent stake in the company. Initially, the deal had seemed to go as Romney had envisioned. He had helped take Damon public in 1991, and the company had paid down some of its debt from the buyout and sold off unwanted businesses. In August 1993, Bain helped sell the company to Corning and nearly tripled its money. Romney personally reaped $473,000. The day after the merger was completed, Damon’s Needham plant was shut down, and 115 people were laid off.
It was later revealed that during Romney’s tenure on the board, federal investigators had been looking into whether the company had defrauded Medicare by overbilling for blood tests. Indeed, the same month that Damon was acquired, it received subpoenas from the federal government regarding an investigation of the matter. Romney said he had first learned about allegations of overbilling by a rival firm in December 1992 and been moved to insist that the board hire an outside attorney to investigate Damon’s billing practices. Romney said that the board had taken “corrective action” and investors had “received a good return on their investment because we were able to blow the whistle.”
As the details of the federal case were made public, however, Romney’s version appeared questionable. He later faced criticism from his political opponents about whether he had really played any role in uncovering the fraud—and whether he could have reported the overbilling practices to authorities earlier. In 1996, Damon pleaded guilty to criminally defrauding Medicare and Medicaid of $25 million and paid $119 million in fines, the most at that time
for a health care fraud case. United States Attorney Donald Stern of Massachusetts, who handled the case, called it “corporate greed run amok.” Four company executives would be charged with conspiring to defraud Medicare; one received a three-month jail sentence. Prosecutors said a former Damon employee had blown the whistle on the billing practices. And the government credited Corning, not Romney or his fellow Damon directors, with cleaning up the situation.
The matter received little notice until a decade later, when Romney was in pursuit of the Massachusetts governorship. His Democratic opponent, Shannon O’Brien, accused him of lax oversight at Damon and failing to report the fraud. “There is a mess in corporate America, and its name is Mitt Romney,” she said during a debate with him. But although some of the fraud occurred during Romney’s time on Damon’s board, he and other board members were never implicated in the case. The Damon case raised a recurring question about corporate governance: how much responsibility does a board member have for what happens at a company he helps oversee? In his comments about Damon, Romney seemed at times to hold two views of the matter, both of them to his benefit. On the one hand, he said he hadn’t known what was going on at Damon; on the other, he said he’d helped to put a stop to practices later found to be fraudulent. One thing that looked good at Damon was the bottom line for Bain. In the end, it was a profitable deal for both the firm and Romney, however tainted by legal troubles and layoffs it may have been.
Romney excelled at courting investors to put millions of dollars into his funds. He was a shrewd analyst of proposed ventures. But he was never an expert at finding new deals. Indeed, he brought few investment proposals to the table, and when he did, they often flopped. One day, for example, Romney arrived at work with what he thought was a great idea. It came from a friend, Reed Wilcox, whose background was almost uncannily like Romney’s: Wilcox, a Mormon, had both law and business degrees from Harvard, was a Brigham Young University alumnus, had worked at Boston Consulting Group, and would later do missionary work in France. Now Wilcox was with a company that had developed a technology that enabled photographs of children to be used to create dolls that looked like them. The two-foot-high, $150 dolls became popular and were featured in magazines. Romney authorized a $2.1 million investment from Bain Capital in 1996, and he personally loaned money for the operation. The company, called Lifelike, had manufacturing operations in Colorado and Hong Kong. But sales dropped when the economy sputtered in 2001; and by 2003 there were production and quality problems, and hundreds of consumers complained to Colorado’s attorney general that they hadn’t received their dolls in time for Christmas 2003. By early 2004, Lifelike was bankrupt. It owed nearly $2 million to its Hong Kong manufacturer and hundreds of thousands of dollars more to advertising agencies and other creditors. In May of that year, a judge approved an auction of the company’s assets, which went for $1.1 million. Bain lost its money. Lifelike became a deal Bain partners wanted to forget; they shook their heads when asked about it and erased mention of it from the company’s web site.
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.
Romney 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.”
The Real Romney Page 18
