Just as Romney took the reins, the entire Bain operation moved from its funky surroundings at Faneuil Hall, where the younger partners had enjoyed the hustle and bustle of the marketplace and the buildings with exposed brick and pipes, to a newly opened office tower at Copley Place in Boston’s Back Bay. Crammed into a sterile suite on the seventh floor, with metal desks and outdated chairs, the partners shared a small room and Romney had his own office. The consulting business of Bain & Company was at one end of the hall, and the spin-off, Bain Capital, was at the other. The setting was businesslike and spare, and that suited Romney. He struck some of his partners as being uncomfortable amid crowds, ill at ease when riding an elevator with everyday shoppers. He was at home in the conference room, free of distractions. An early riser, he was usually the first in the office and often forgot to eat lunch. He was ruthlessly efficient with his time, both to get the work done at the office and to ensure that he could make it to church activities and his kids’ athletic events. If he took a briefcase home with him, he said, he left it in the car.
Romney, fully in charge, searched for partners who fit his comfort zone. He promised his new hires that they would all be key players, with every major decision hashed out openly in meetings. Romney once described his style as a two-step process. One step was to “wallow in the data,” following the “Bain Way” of deep analysis. Then he encouraged vigorous debate: “Get people of different background and experience who disagree with each other and are willing to debate and argue.” He was, in a sense, replicating the way he had once dissected cases with his fellow students at Harvard Business School. In business, the method often worked well. Later, in politics, Romney would find that the model didn’t fit so neatly.
Most of Romney’s hires were of a certain type: they were spreadsheet geeks ranking at the top of their class, often alumni of Stanford, where Romney had spent an undergraduate year, or Harvard. Though Bain & Company was a much-sought-after workplace in the 1980s, Bain Capital was little known and risky. Some of Romney’s recruits were attracted by the pace of life in a relatively provincial city like Boston and passed over glamorous jobs in New York City or on the West Coast. One former partner described the group as a cast of brilliant, socially awkward young men—and they were all men—anxious to prove that they were just as worthy as peers who had gone to big Wall Street firms. Bob White and Josh Bekenstein were hired by Bain & Company out of Harvard Business School, and Geoffrey Rehnert came from Stanford Law School. Romney was only thirty-seven when he took the reins of Bain Capital, and many of his new employees were a decade younger.
Robert Gay came by a different route. Gay, one of the few Bain employees who shared Romney’s Mormon religion, worked for a Wall Street firm but had become disgusted by deals being done largely for big fees, whether merited or not, and by the job losses or factory closures that often followed mergers and acquisitions. Afraid that he would become the kind of person he “despised,” Gay leapt at a chance to become one of Romney’s partners. Financially, it made “no sense,” he said later. Bain was a fraction of the size of Wall Street firms, with fifteen employees and only a handful of deals completed. But Gay was convinced that Romney would enable him to exercise much more “influence for good” at Bain than he could elsewhere. So he took a pay cut and signed on. Gay and the other partners had one thing in common: they were utterly loyal to Romney, and that loyalty would only grow as they all grew rich together.
Thus began Romney’s fifteen-year odyssey at Bain Capital. Boasting about those years when running for senator, governor, or president, Romney would usually talk about how he had helped create jobs at new or underperforming companies and say that he learned how jobs and businesses come and go. He’d typically mention a few well-known companies in which he and his partners had invested, such as Staples. But the full story of his years at Bain Capital is far more complicated and has rarely been closely scrutinized. Romney was involved in about a hundred deals, many of which have received little notice because the companies involved were privately held and not household names. The most thorough analysis of Romney’s performance comes from a private solicitation for investment in Bain Capital’s funds written by the Wall Street firm Deutsche Bank. The company examined sixty-eight major deals that had taken place on Romney’s watch. Of those, Bain had lost money or broken even on thirty-three. Overall, though, the numbers were stunning: Bain was nearly doubling its investors’ money annually, achieving one of the best track records in the business. Most of that success came from a handful of little-known but incredibly successful investments. But the venture had begun with plenty of failures—and lessons.
Romney was on yet another road show to attract investors, firing up an overhead projector and explaining how prudently he would handle their money if they bought into the fund that would make up Bain Capital’s first pool of capital. It could be a hard sell; his firm had no track record to speak of, just that magic name Bain. Romney and a number of Bain & Company partners had put $14 million of their own money into the fund and then worked to drum up support from outsiders. He and his road-show partner, Coleman Andrews, were well short of their funding goal. Then, one day, Romney got a tip from a Bain & Company executive, Harry Strachan, that some wealthy families in war-torn regions of Central America were looking for a place to invest, a safe harbor for their cash.
Romney was intrigued but worried. Already thinking of a career in politics, he wanted to be sure that the funds would not later be regarded as tainted. El Salvador, for example, was a scene of regular massacres and assassinations of political figures. Strachan said Romney “expressed to me that I had to put my hand in the fire for him, that none of the people we were introducing to him were involved in illegal drug money, right-wing death squads, or left-wing terrorism.” Strachan assured Romney that he would carefully vet the investors, including one whose nephew reputedly had a questionable background; he concluded that the investors’ money was clean. With that assurance, Romney agreed to meet with the Central American investors at a Miami bank, where he approved the investment. Years later, when he was asked about reports that some of the family members of investors might have had ties to paramilitary groups, he said he was satisfied that the individuals who had put money into Bain Capital had gotten the funds from legitimate sources. “We investigated the individuals’ integrity and looked for any obvious signs of illegal activity and . . . found none,” Romney said. For Bain, the Central American money was crucial, providing $6.5 million of $37 million in the fund.
Now the question was where to invest. Romney dispatched his new partners to study potential deals of the two types prevalent in the market: buyouts, which involved purchasing existing companies, and venture capital investments in younger businesses that had yet to take off. In the early 1980s, venture capital was a niche field, dominated by Wall Street financiers backing high-tech companies. It could take years for such infant concerns to become profitable; payoffs were unpredictable, but winners could be bonanzas. Juggernauts such as Apple Computer had started with venture funding in the 1970s, and companies such as Cisco Systems were taking off in the 1980s. But Romney and his partners were loath to do battle in high tech, where they didn’t feel they had an edge. “We thought we’d lose if we tried to invest in technology-based start-ups,” Bekenstein said.
Romney was, by nature, deeply risk averse in a business based on risk. He worried about losing the money of his partners and his outside investors—not to mention his own savings. “He was troubled when we didn’t invest fast enough, he was troubled when we made an investment,” Andrews said. “He never wanted to fall short on commitments or representations made to investors.” So rather than jump boldly into new fields, he focused his attention on more mundane corners of the economy: makers of wheel rims, photo albums, and handbags, to cite three examples. Sorting through possible investments, Romney met weekly with his young partners, pushing them for deeper analysis and more data and giving himself the final vote on whether to go forwar
d. They operated more like a group of bankers carefully guarding their cash than an aggressive firm eager to embrace giant deals. Tellingly, Romney called the group that reviewed deals the credit committee, instead of the investment committee (the usual term), and his banker’s jargon stuck. Perhaps the caution came from his family background. Generations of boom and bust had lifted the fortunes of his ancestors and then impoverished them until his father, George, had made it big. And even George had staked his reputation on being liberal on social issues but conservative with other people’s money. Wherever the impulse came from, Romney was so relentless in playing the role of devil’s advocate that his partner Bob White would joke about wanting to “punch him in the nose.”
Some partners suspected that Romney always had one eye on his political future. “I always wondered about Mitt, whether he was concerned about the blemishes from a business perspective or from a personal and political perspective,” one partner said years later. The partner concluded that it was the latter. Whereas most entrepreneurs accepted failure as an inherent part of the game, the partner said, Romney worried that a single flop would bring disgrace. Every calculation had to be made with care.
One winter evening in 1985, Romney sat in a drab ten-by-ten-foot conference room in Bain Capital’s office, flapping his tie to mimic a rapidly beating heart. His colleagues knew that when Romney flapped his tie, he was feeling pressure. At the time, he was so worried about Bain Capital’s future that, according to one colleague, he raised the possibility of returning the millions they had received from investors and going back to their old jobs. Dressed in a crisp blue shirt with a white collar and gold collar pin, Romney appeared to be the model of a successful 1980s financier. But his shirt, according to his former colleague Geoffrey Rehnert, was drenched dark with sweat under his arms. “Mitt was struggling,” Rehnert said. “And he wasn’t used to struggling.”
Romney and his partners, in avoiding high tech, had taken on some challenging, if obscure, investments. One of Bain Capital’s first deals was the $2 million it put into Key Airlines in 1984. Key ran shuttle routes from Las Vegas deep into the Nevada desert, used mainly by government personnel. Bain wanted to expand the operation and added contract flights for tourism to places like Mexico and the Caribbean. Two years later, Bain merged Key with a start-up airline, Presidential Airways, which went public, and Bain ultimately more than doubled its investment, to $5.4 million. (The company’s fortunes did not last; Presidential went bankrupt in 1989.) Another early deal was MediVision, which ran surgical centers for outpatient eye surgery. An effort to expand by building centers around the country was slow, but buying facilities worked out better, and the company was ultimately packaged with a medical supply start-up and sold to a larger firm at a profit. Holson Burnes, a company that made photo accessories, also struggled. Bain had bought the photo album maker in 1986 and after a few tough years had merged it with a frame maker, but the combination didn’t immediately pay off. There were cost cuts, including layoffs, and product problems. An analog version of a digital photo frame—a contraption that, with a press of a button, would flip from one photo in a stack to the next—didn’t work well at first. It wasn’t until 1992 that Bain would take the company public—well beyond Bain’s goal of a three-to-five-year investment—and ultimately double its money on the $10 million investment.
Despite the struggles, 1986 would prove to be a pivotal year for Romney. It started with a most unlikely deal. A former supermarket executive, Thomas Stemberg, was trying to sell venture capitalists on what seemed like a modest idea: a cheaper way to sell paper clips, pens, and other office supplies. The enterprise that would become the superstore Staples at first met with skepticism. Small and midsize businesses at the time bought most of their supplies from local stationers, often at significant markups. Few people saw the profit margin potential in selling such homely goods at discount and in massive volume. But Stemberg was convinced and hired an investment banker to help raise money. Romney eventually heard Stemberg’s pitch, and he and his partners dug into Stemberg’s projections. They called lawyers, accountants, and scores of business owners in the Boston area to query them on how much they spent on supplies and whether they’d be willing to shop at a large new store. The partners initially concluded that Stemberg was overestimating the market. “Look,” Stemberg told Romney, “your mistake is that the guys you called think they know what they spend, but they don’t.” Romney and Bain Capital went back to the businesses and tallied up invoices. Stemberg’s assessment that this was a hidden giant of a market seemed right after all.
Romney hadn’t stumbled on Staples on his own. A partner at another Boston firm, Bessemer Venture Partners, had invited him to the first meeting with Stemberg. But after that, Romney took the lead; he finally had his hands on what looked like a promising start-up. Bain Capital invested $650,000 to help Staples open its first store in Brighton, Massachusetts, in May 1986. In all, it invested about $2.5 million in the company. Three years later, in 1989, Staples sold shares to the public, when it was just barely turning a profit, and Bain reaped more than $13 million. It was a big success at the time. Yet it was very modest compared with later Bain deals that reached into the hundreds of millions of dollars.
For years Romney would cite the Staples investment as proof that he had helped create thousands of jobs. And it is true that his foresight in investing in Staples helped a major enterprise lift off. But neither Romney nor Bain directly ran the business, though Romney was active on its board. At the initial public offering, Staples was a firm of 24 stores and 1,100 full- and part-time jobs. Its boom years were still to come. Romney resigned his seat on the board of directors in 2001 in preparation for his run for governor. A decade later, the company had more than 2,200 stores and 89,000 employees.
Assessing claims about job creation is hard. Staples grew hugely, of course, but the gains were offset, at least partially, by losses elsewhere: smaller, mom-and-pop stationery stores and suppliers were being squeezed, and some went out of business entirely. Ultimately, Romney would approvingly call Staples “a classic ‘category killer,’ like Toys ‘R’ Us.” Staples steamrollered the competition, undercutting prices and selling in large quantities. When asked during the 1994 Senate campaign about his job creation claim—that he had helped create ten thousand jobs at various companies (a claim he expanded during his 2012 presidential campaign to having “helped to create tens of thousands” of jobs)—Romney responded with a careful hedge. He emphasized that he always used the word “helped” and didn’t take full credit for the jobs. “That’s why I’m always very careful to use the words ‘help create,’ ” he acknowledged. “Bain Capital, or Mitt Romney, ‘helped create’ over 10,000 jobs. I don’t take credit for the jobs at Staples. I helped create the jobs at Staples.”
Howard Anderson, a professor at MIT’s Sloan School of Management and a former entrepreneur who has invested with Bain, put it more plainly: “What you really cannot do is claim every job was because of your good judgment,” he said. “You’re not really running those organizations. You’re financing it, you’re offering your judgment and your advice. I think you can only really claim credit for the jobs of the company that you ran.” Stemberg, however, begrudges Romney nothing. If Romney gets the blame for jobs lost on Bain Capital’s watch, he said, “Why not give him credit for every job ever created at Staples? One could argue that he was instrumental in Staples both getting started and, more importantly, being successful. It goes both ways.”
The same year Romney invested in Staples—digging into a true start-up—he also inked the biggest transaction, by far, that Bain Capital had put together up till then. And with this $200 million deal, he waded fully into the high-stakes financial arena of the time: leveraged buyouts, or LBOs. Whereas a venture capital deal bet on a new business, pursuing an LBO meant borrowing huge sums of money to buy an established company, typically saddling the target with big debts. The goal was to mine value that others had missed, to quickly impr
ove profitability by cutting costs and often jobs, and then to sell. Romney thought he and his team could add to that equation by making management and operational changes to grow the company’s business. Romney would later acknowledge the shift in his thinking about whether to stress venture capital investments or LBOs. Initially, he thought that putting money into young firms “would be just as good as acquiring an existing company and trying to make it better.” But he found that “there’s a lot greater risk in a start-up than there is in acquiring an existing company.” He was unnerved by the prospect of investing money when “the success of the enterprise depended upon something that was out of our control, such as ‘Could Dr. X make the technology work?’ or would the market develop in the future that had not yet come to fruition?”
He was much more comfortable in an environment where the issue wasn’t whether an idea would pan out but whether the numbers worked. He knew himself, knew that his powers ran less to the creative than to the analytical; he was not at heart an entrepreneur. Perhaps that was what led him to push the pause button at the outset with Bill Bain. But he now felt ready to take on much bigger financial risks, mostly by making leveraged bets on existing companies, whose market was known and which had business plans he could parse and master.
Romney found an ideal target in the auto industry, a field he knew well from his Michigan upbringing. It was a wheel-rim maker for trucks called Accuride, part of the empire of tire giant Firestone. There was no “Dr. X” factor to fear here. The wheel-rim business was as unsexy, and as solid, as it got. Firestone wanted to sell the Kentucky-based business because it wasn’t part of its major product line. Bain told management and unions that current employees would not be laid off, a pledge the firm did not repeat in many other deals. Bain vowed to grow the business by making substantial changes, from revamping production and giving executives greater pay incentives to offering discounts to customers who agreed to give Accuride all their business. That was part of what one Romney colleague at Bain & Company called the “loyalty effect,” giving employees, customers, and investors incentives to make a company successful.
The Real Romney Page 16