The Real Romney

by Kranish, Michael

  The amount of money now being earned at Bain Capital was skyrocketing, and much of it came from a handful of giant deals. During Romney’s fifteen years there, the firm invested about $260 million in its ten top deals and reaped a nearly $3 billion return. That was about three-quarters of its overall profit on roughly one hundred transactions during Romney’s tenure. In one of his most specific explanations of how he made his fortune, Romney wrote in his autobiography, Turnaround, that he had not taken “the standard investment banker approach of snatching up companies with high, sustained growth, hanging on for six months, and then flipping them for a profit.” Instead, he wrote, “We were looking for troubled companies, businesses that were not performing as well as we think they could.” Romney said he or his partners would then “go to work to help management make their business more successful.” He wrote that most of the companies were ones that “no one has heard of—TRW’s credit services, the Yellow Pages of Italy.” Those weren’t just any two deals. They were two of the most lucrative of Romney’s career, and luck played a big part in both. One was a quick hit with a huge payout, and the other benefited unexpectedly from the Internet frenzy.

  The first deal was for a credit-reporting service owned by the defense and aerospace company TRW. At first it seemed a mundane transaction, even though it was the biggest investment of Romney’s career, with Bain and its partners putting in about $100 million. Romney had little to do with the deal other than helping approve the investment. His partners included a savvy deal maker at another Boston private equity firm, Scott Sperling, of the Thomas H. Lee Company. The Bain and Lee groups had agreed to invest fifty-fifty and had taken preliminary control of the credit company spin-off, pending assurances that a fast new database system would be successful. They were thinking that they could make three times their money in about five years—a conservative return in their business.

  With the newly named credit company Experian in hand, the Bain-Lee group was looking for other credit services to acquire, hoping to build a credit-reporting empire. One such inquiry went to a British company, Great Universal Stores, which was known for its Burberry chain but also had a credit unit. But it turned out that Great Universal didn’t want to sell its credit service; it wanted to build it into something bigger. So Great Universal came back to the Bain-Lee group with a surprising response: it wanted to buy Experian. The Bain and Lee partners were stunned. A mere seven weeks after buying it, Romney and his partners flipped the company. Bain’s $100 million investment returned at least $300 million. The Wall Street Journal, without mentioning Romney’s name, said the windfall would “go down as one of the quickest big hits in Wall Street history.” Romney personally pocketed millions of dollars. The profit margin and quick turnaround on the deal stunned investment houses around the world. Two of Romney’s associates used an identical phrase in describing how it turned out: it was like being “hit with the lucky stick.”

  The second deal cited by Romney took longer but involved even more good timing and luck. It began with a renowned Italian investor named Phil Cuneo, who had the idea of buying the Italian version of the yellow pages. The companies that produced the bulky phone books were being bought and sold by investment houses around the world at the time. The deal was managed by Bain Capital partner Mark Nunnelly. It was unusual for Bain to invest in an Italian company, and Romney pressed Nunnelly. “Gee, Mark, are you sure?” he asked. “Gee, Mark, have you looked under every rock?” He was flapping his Hermès tie, mimicking a fast-beating heart; this one made him nervous.

  Romney eventually agreed to the deal, and Bain Capital contributed $51.3 million. It seemed a solid investment in a firm with a staid and stable business model. But months after closing the deal, Cuneo and his Bain associates realized that they had acquired a company that might benefit from the surging interest in dot-com businesses. That had not been part of the original justification for the investment. “We stumbled on the Internet bubble,” Cuneo said. “We started seeing what was happening in the U.S.” Indeed, before long, they found they had bought a pot of gold. The yellow pages company owned a web-based directory that had the potential to be the Italian version of America Online or Yahoo! Romney was a well-known skeptic of Internet plays—correctly fearing that some would burst in an inevitable bubble—but this one seemed to have fallen into his lap at just the right time. The company, known by its acronym, SEAT, began to soar on the stock market, and Cuneo and Bain Capital began positioning it as “an Internet star.”

  In just under three years, in September 2000, the partners sold the investment, earning a windfall that far exceeded anyone’s initial expectations. Bain’s $51.3 million investment in the Italian yellow pages returned at least $1.17 billion, according to a Romney associate familiar with the deal. There is no public documentation of the how the profits were distributed, but at that time at least 20 percent of the return would have gone to Bain Capital. Of that, Romney’s typical payout at the time was 5 to 10 percent. That means this one obscure deal would have given him a profit of $11 million to $22 million. If Romney made a side investment in the deal, as was standard among Bain partners, he would have made even larger gains. One Romney associate said Romney’s total profit could have been as much as $40 million. (A Romney spokesman did not respond to questions about the deal.) A Romney associate marveled that the deal “wasn’t like being hit by the lucky stick; it was being thrashed by it.”

  It was those kinds of deals that enabled Bain Capital to report the highest returns in the business in the 1990s. That is why the firm, citing Romney’s track record, was able to raise its share of profits on deals to a stunning 30 percent—up from the industry standard of 20 percent—on top of its 2 percent up-front fee. Investors were willing to pay the higher share in the belief that Romney and his Bain team were worth it. Their history—averaging an 88 percent annual return over the fifteen years—said they were. “The returns were just eye-popping, and Bain Capital was able to command a premium,” former Bain Capital partner Geoffrey Rehnert said. Romney himself would sometimes boast as well, comparing the Bain results with the 3 to 4 percent payout of “passbook” savings accounts. Not many of Bain’s customers carried passbooks, of course; the minimum stake for investors was generally $1 million.

  Romney’s own wealth had increased exponentially. His net worth would grow to at least $250 million, and maybe much more, a trove that would enable him to foot a large part of the bill for his 2008 presidential campaign. Asked about a report that his wealth at one point reached as high as $1 billion, Romney said, “I’m not going to get into my net worth. No estimates whatsoever.” The extent of Romney’s personal take was helped by a favorable tax rate. Most of Romney’s income came from capital gains at the Bain funds, not from salary. Under federal tax law, capital gains are taxed at a much lower rate than regular income. In 1999, when Romney stepped down as the head of Bain Capital, the top tax rate for income was 39.6 percent, while the top rate for capital gains was about half that, at 20 percent. This differential meant that Romney, like most high earners, was paying a lower tax rate on most of his earnings than some of the lowest-level workers at his firm and many working-class Americans.

  For fifteen years, Romney had been in the business of creative destruction and wealth creation. But what about his claims of job creation? Though Bain Capital surely helped expand some companies that had created jobs, the layoffs and closures at other firms would lead Romney’s political opponents to say that he had amassed a fortune in part by putting people out of work. The lucrative deals that made Romney wealthy could exact a cost. Maximizing financial return to investors could mean slashing jobs, closing plants, and moving production overseas. It could also mean clashing with union workers, serving on a board of a company that ran afoul of federal laws (as in the Damon case), and loading up already struggling companies with debt.

  There is a difference between companies run by buyout firms and those rooted in their communities, according to Ross Gittell, a professor at
the University of New Hampshire’s Whittemore School of Business and Economics. When it comes to buyout firms, he said, “The objective is: make money for investors. It’s not to maximize jobs.” Romney, in fact, had a fiduciary duty to investors to make as much money as possible. Sometimes everything worked out perfectly; a change in strategy might lead to cost savings and higher profits, and Bain cashed in. Sometimes jobs were lost, and Bain cashed in or lost part or all of its investment. In the end, Romney’s winners outweighed his losers on the Bain balance sheet. Marc Wolpow, a former Bain partner who worked with Romney on many deals, said the discussion at buyout companies typically does not focus on whether jobs will be created. “It’s the opposite, what jobs we can cut,” Wolpow said, “because you had to document how you were going to create value. Eliminating redundancy, or the elimination of people, is a very valid way. Businesses will die if you don’t do that. I think the way Mitt should explain it is, if we didn’t buy these businesses and impose efficiencies on them, the market would have done it with disastrous consequences.”

  Romney has stood by his assertion that he helped create a “net, net” of tens of thousands of jobs, and Bain Capital officials said in 2011 that his claim is accurate. However, neither Romney nor Bain provided documentation of that claim. Nor is the claim something that can be verified independently with anything approaching certainty. Many companies that Romney held briefly were in private hands and changed owners numerous times. They were saddled with debt, restructured, and split up. Some companies under Romney’s control prospered, and some failed; some produced new jobs, and others shut down and left people out of work. It is possible that many of the companies in which Romney invested might otherwise have gone out of business entirely.

  The best example of Romney’s turnaround skills came when he saved his old firm, Bain & Company. In that case, 260 people were laid off, salaries and benefits were cut, and a painful restructuring plan was put into place. But without Romney’s work, the entire enterprise might have sunk, taking Bain Capital with it. In the long run, Romney enabled Bain & Company and Bain Capital to grow—and that is Romney at his best, using the power of “creative destruction” to cut some jobs and eventually create new ones. Without those hard decisions, Romney’s own job might not have survived, and he very likely would not have had a future in politics. “The goal of the investor in Bain Capital is to make absolute returns,” said Howard Anderson, the MIT professor who has also been a Bain investor. “When they do well, Bain does well. When Bain does well, they do well. It is essentially capitalism at its finest—and its worst.”

  Romney was nine years into his fifteen-year career at Bain Capital when he began having thoughts that he would later describe as “irrational” but that in retrospect seem wholly predictable. It was 1993, and he was feeling both fulfilled and restless. He had earned huge sums—but not yet the hundreds of millions of dollars that later deals would bring—and seemed ready for something new. Everyone who knew Mitt well, from his fellow missionaries to his college classmates to his business partners, knew that he seemed to have his heart set on someday moving from business to politics. The only question was when.

  He minutely analyzed his options, as always. The numbers looked good; his tally of accomplishments was impressive. But still something seemed missing. What he had achieved to date seemed to him more a means than an end. There had always been another goal held in reserve, one he had carefully safeguarded through the years. At many stages of his life, he had confided to colleagues: I need to be careful about this; I might run for public office one day. The thought was always there. Now he talked it over with Ann and then with his father, the author of his life’s ambitions. In deciding when to exit the business of making money, George Romney’s example was vivid. Mitt often recalled how his father had “walked away from success” and run for governor of Michigan. His father’s business experience had been as pure as it got; George took over a failing company, stayed long enough to set it on a course for success, and left on his own terms. As Mitt later wrote, “Work was never just a way to make a buck to my dad. There was a calling and purpose to it. It was about making life better for people.”

  And so, in the security of his boardroom at Copley Place or at his family manse in Belmont, Romney kept asking himself “Do I really want to stay at Bain Capital for the rest of my life? Do I want to make it even more successful, make even more money? Why?” The answer, when it came, made his choice seem obvious: “I thought of my dad,” he said. He would follow the family standard and enter the world of public service. And, like his father, he had it in mind to start near the top rung. Indeed, he had a big target in mind, with huge risks and also huge potential. Victory could put bring him national notice and put him on the path to the White House, the path on which George Romney had stumbled badly; defeat—well, it was too soon to think about that.

  [ Seven ]

  Taking On an Icon

  I was getting ready for this guy that was going to be kind of a doddering old fool. I’d be able to crush him like a grape.

  —MITT ROMNEY ON TED KENNEDY

  He came from Welsh coal-mining stock and built his own American dream: a job at General Motors; a successful engineering firm hatched in his basement; three children who found a spiritual home within the Mormon church; and a bevy of grandkids who knew him as “Pops.” But those were better days. Edward Roderick Davies, in his midseventies and living with his daughter and son-in-law, Ann and Mitt Romney, was now fighting a losing battle with prostate cancer. One afternoon in the early 1990s, as Ann was putting dishes away in their kitchen, he turned grave. “I’m so mad that I’m dying,” he said.

  Davies wasn’t looking for pity. Decades earlier, his own father, having nearly been killed by a runaway coal cart, had brought his family from South Wales to the United States in search of something better. Now confronting his own mortality, Davies wanted his daughter to make the most of the opportunities she and her husband had been given. “He said, ‘Ann, you’ve got so much living to do. Think of the exciting things that will happen in the world. I’m so jealous of all the wonders you’re going to see in your lifetime,’ ” Ann later recalled.

  Edward Davies died not long after. But his words stuck. Ann suddenly couldn’t bear the thought of looking back over her life with regret. Losing both her parents within a year had sparked a slew of existential questions: “Who am I? What am I doing? And what’s life about?” The conversation with her father still resonated in 1993, when Mitt and Ann began talking about taking on Edward M. Kennedy in the upcoming Senate race. Mitt resented Kennedy’s rakish behavior and rejected his liberal ideas. “I’ve been living here for twenty-three years, and I’ve been saying, ‘Somebody ought to go after that guy,’ ” he later told a group of business leaders. Besides, Kennedy had been in the Senate since 1962, when Mitt was a geeky fifteen-year-old. Ann remembered thinking, “Are we going to die some day and then say, ‘Mitt, you never did it? You never tried?’ ”

  So she brought it up as they were lying in bed one morning that summer, as Ann and Mitt tell it. They’d been blessed, Ann told her husband, and now they should share that blessing. Invoking his family’s political legacy, Ann told Mitt it was time he took on Kennedy himself. “You can gripe and gripe and gripe all you want about how upset you are about the direction the country’s going,” she recalled telling him. “But if you don’t stand up and do something about it, then, you know, shut up and stop bothering me.” Mitt pulled the covers over his head. “No! No! I don’t want to do it,” he said. “I just about fell out of bed,” he would say later. But he couldn’t deny that she had a point. He was, at forty-six, firmly established in his business career and contented with his life at home and church. He seemed to have it all. But that just left him with a question: what was left to do? So following a period of reflection, polling, and soundings with influential Republicans, Romney convinced himself that his wife was right. That October, after they secluded themselves, fasted, and prayed, Ann an
d Mitt Romney made up their minds: he would launch a campaign to oust Ted Kennedy, one of the United States’ great liberal fixtures, from the U.S. Senate.

  It was a bold proposition. This was Massachusetts, where Democrats reigned and the Kennedys were royalty. Over more than three decades in Washington, Ted Kennedy had established himself as one of the preeminent voices on the left, a champion of civil rights, education, health care, and the working class. And he was a political titan: no opponent had ever given him a serious scare. By 1994, however, the political climate had turned, and not in his favor. Around the country, voters had grown weary of incumbents. Republicans had begun, after years of political near irrelevance, to prove they could win in Massachusetts. And Kennedy himself had just emerged from a period of reckless personal behavior, further eroding his public standing.

  In the decade between his divorce from Joan Kennedy in 1982 and his second marriage, to Victoria Reggie, in July 1992, Kennedy’s reputation for womanizing, drinking, and partying had become the stuff of lore—and the shadow of Chappaquiddick still fell over his head. It surely didn’t help his image with voters that in 1991, he had taken his younger son, Patrick, and a nephew, William Kennedy Smith, to a bar in Palm Beach, Florida, and that Smith had been charged with raping a woman he’d brought back to the Kennedy estate. Smith was later acquitted, but for Kennedy, whose testimony at the trial was nationally televised, it was a low point. He took criticism even from friends and friendly media. His efficacy in the Senate was diminished, which was especially evident during the Supreme Court confirmation hearings for Clarence Thomas. Kennedy, usually a forceful presence, played only a secondary role. Ultimately, he was forced to turn a planned speech at Harvard University into a public apology, a promise to mend his ways. “I recognize my own shortcomings—the faults in the conduct of my private life,” Kennedy said. “I realize that I alone am responsible for them, and I am the one who must confront them.” All in all, it was hardly the profile of a man invulnerable to political challenge.