How Many Jobs Did Romney Create at Bain?
Thursday, January 19, 2012
Editor’s note: See yesterday’s article “How to Think about Private Equity” for a primer on this issue.
Given the political controversy over private equity and Mitt Romney’s tenure at Bain Capital, it’s worth taking time to ask, how did Bain Capital perform for its investors?
To get some perspective, it’s first worth acknowledging that the average private equity firm has delivered better returns to its investors than those investors would have earned in the stock market. In a recent paper, Bob Harris, Tim Jenkinson, and I estimate that $1 invested in a private equity fund delivered 20 percent more than $1 invested in the Standard & Poor's 500 Index.1 In our sample alone, the outperformance works out to more than $120 billion in additional value to investors. This performance benefited the pension funds, endowments, and other limited partners that invested over this period.
Even in an industry with such strong performance, Bain Capital stood out. During Romney’s tenure, the firm raised five private equity or buyout funds. All five outperformed the typical private equity fund. Four of the five were well into the top quartile of performance.
In other words, Bain Capital and Romney delivered strong results for their customers, better than other private equity firms that on average outperformed the public markets. Today, those customers include the California State Teachers' Retirement System and the Teacher Retirement System of Texas.
Bain Capital also made venture capital investments from other funds in start-ups and other earlier stage companies that are not included in the performance measure mentioned above. Those venture capital investments included successful investments in Staples, Sports Authority, and Gartner Group.
How many jobs did Romney and Bain Capital create?
While we will probably never be able to measure the true numbers, it seems pretty clear that ‘looting’ is an inaccurate description of what happened with these companies.
There are two ways to look at job creation. The first is to look at jobs created and lost in Bain Capital’s companies at the time Romney left Bain Capital at the beginning of 1999. The second is to look at jobs created and lost in those same companies today. This gives Romney and Bain Capital credit for having invested in those companies when they were young. It is inappropriate to include companies that Bain Capital invested in after Romney left because he did not have any impact on those investments.
While it is difficult, if not impossible, to get employment data on all of Bain Capital’s investments, and not all of the data are perfect, it is possible to look at some of the successes and failures to get a sense of magnitudes.
Among Bain Capital’s investments under Romney, the large job creators are clearly Staples and Sports Authority. Both of these were small, young companies when Bain Capital invested in them. Bain invested in Staples when it had only one store, so there were likely fewer than 200 employees at the time. Bain appears to have invested in the Sports Authority when it had fewer than ten stores. Unfortunately, there are no public data to say how many people were employed at that time. At the end of 1998, Staples had more than 42,000 employees, Sports Authority had almost 14,000, Gartner Group had almost 3,000, and Steel Dynamics had over 500. So at the beginning of 1999, when Romney left Bain Capital, these four companies alone employed almost 60,000 total employees. While some of the job growth at Sports Authority came from acquisitions, there is no doubt that these four companies created tens of thousands of jobs over the period.
Fast forward to today. By the end of 2011, Staples had about 89,000 employees. Sports Authority is now a private company. The last time it reported employee numbers, in 2006, it had 14,300 employees. In addition, Gartner Group had over 4,400 and Steel Dynamics had over 6,000 employees. Using the most recently available data, these four companies alone employed almost 125,000 total employees.
Bain Capital also successfully turned around several existing businesses during Romney’s tenure. For example, Bain Capital bought Wesley Jessen Vision Care for $6 million in 1994. It had been a division of Schering Plough and was not profitable. Bain Capital and a new CEO turned it around and sold it to Ciba Geigy for over $300 million in 2001. When it was sold, it appears to have had 2,600 employees. Today, the company is part of Ciba Vision.
Overall, then, the companies Bain Capital funded under Romney have created tens of thousands of jobs using any measure.
What happened to the companies that went bankrupt, particularly the companies Bain Capital supposedly “looted”? How many jobs did Romney and Bain Capital destroy?
A Wall Street Journal article mentions four companies—American Pad & Paper (Ampad), Dade Behring, DDI, and Stage Stores—that Bain Capital made very profitable investments in and took money out of; later, the companies went bankrupt. What the article does not tell you is what happened before and after those bankruptcies. When you add it all up today, even in these investments, it looks likely that Bain Capital created jobs overall.
Bain Capital invested in Stage Stores in 1988, when the company was young. Stage went public in 1996 with 9,606 employees. Bain realized $184 million from the investment, then reinvested $23 million for a net payout of $161 million. Employment expanded to 15,700 employees by 1999. The company was hurt by the early 2000 recession and went into chapter 11 bankruptcy in 2000. Employment dropped back to 9,800 in 2001. Subsequently, Stage left chapter 11 and today it employs 13,500 people. So, even at its lowest point, Stage Stores had more employees than when it went public. Today, Stage has roughly 3,900 more employees than it did in 1996.
Bain Capital and Romney delivered strong results for their customers, better than other private equity firms that on average outperformed the public markets.
Bain Capital bought Dade from Baxter in 1994. They later merged it with Behring. Bain Capital took Dade public in 1996 and cashed out $216 million. Dade went bankrupt in 2002 but it recovered, improved operating income to over $300 million, and was acquired by Siemens for over $6 billion in 2007. Bain would have been better off holding rather than cashing out. What happened to employment? When Dade went public in 1996, it employed 5,500. This increased to 7,400 with an acquisition in 1997. Employment declined thereafter, reaching a bottom of 6,000 in 2002. It rebounded to 6,400 in 2006, just before the sale to Siemens. So, overall, employment declined by 1,000 from its peak in 1997 to its final level in 2006. This was undoubtedly unpleasant, but does not seem to be as dire as portrayed.
DDI produced circuit boards for the telecom business. It went public with 1,800 employees in 1999. It then made an acquisition to get to 3,200 employees. After the tech bubble burst, the company’s business declined and it went into chapter 11 bankruptcy. Like the other two companies above, DDI came out of bankruptcy and today has almost 1,700 employees and is profitable. So, overall, employment declined by 1,500.
American Pad & Paper (Ampad) was a manufacturer and marketer of paper-based office products. In 1992, Bain Capital acquired Ampad from Mead. Bain Capital and new management made “additional acquisitions in order to enhance the company's scale, broaden its product line, expand upon its national presence, and strengthen its distribution capabilities.”2 It went public in 1996, but declined soon thereafter, going into chapter 11 in 1999. The different pieces of the business were sold thereafter. Employment was 4,105 in 1996 when the company went public. It had declined to 3,800 by 2000, the last employment numbers available. So, as of 2000, employment had declined by 300. Unfortunately, it is very difficult to know what happened after the pieces were sold.
When you combine the increase at Stage and the decreases at the other three companies, you end up with a net increase in jobs of 1,100. So, even if Ampad suffered another 1,000 job losses in its break up (another 25 percent or larger decline), Bain Capital could argue that these four investments led to a net increase in jobs.
And, when you combine the $6 billion that Dade Behring received from Siemens with any valuation for the other three companies—even zero—it seems likely that Bain would have been better off holding on to its investments rather than cashing out.
While we will probably never be able to measure the true numbers, it seems pretty clear that “looting” is an inaccurate description of what happened with these companies.
Steve Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. He has consulted for investors in private equity funds and for private equity funds. He also has invested personally in both private and public equities. He has no involvement with any presidential candidate.
FURTHER READING: Steve Kaplan also writes “How to Think about Private Equity.” Kevin A. Hassett and Steven J. Davis contend that “Private Equity is a Force for Good.” Jonah Goldberg reflects on “Romney's Authenticity Problem.” AEI President Arthur C. Brooks says “The Value of Free Enterprise has Nothing to do With Money or Wealth.” Scott Shane considers “Small Businesses and Big Unintended Consequences.” Edward Tenner discusses “The Dismal New Science of Stagnationism.”
1. See “Private Equity Performance: What Do We Know?” Robert Harris, Tim Jenkinson, and Steven Kaplan, University of Chicago, September 2011.
2. Ampad. 10-K 1999.
Image by Rob Green / Bergman Group