A Project of The Annenberg Public Policy Center

Lemon-Picking Bain Capital, Obama-style


President Obama and a super PAC that supports him are stealing a page from Newt Gingrich and Ted Kennedy in running TV ads and web videos that slam Mitt Romney for his years at Bain Capital. And, like Gingrich and Kennedy before him, Obama is lemon-picking — that is, highlighting the venture capital firm’s failed businesses and ignoring its successful ones.

Both Obama and the super PAC Priorities USA Action spotlight two businesses — Ampad and GS Industries — that filed for bankruptcy while under Bain’s control, leaving hundreds of workers unemployed. In the case of GS Industries, Bain took over a shrinking company in a difficult market and kept it operating for several years before it filed for bankruptcy (a bankruptcy that was arguably hastened by Bain’s hefty borrowing and self-enrichment). Bain purchased Ampad from a struggling parent company that was shedding jobs and assets, and then expanded it before a heavy debt burden forced it into bankruptcy.

Bain’s portfolio also includes major successes, such as Staples Office and The Sports Authority. But you won’t see them here. Indeed, Romney responded to the TV ad about the bankruptcy of GS Industries, a Kansas City steel company, with his own ad about Bain’s investment in an Indiana steel company that has grown and added thousands of employees. And Bain itself issued a statement defending its overall record, saying that “revenues grew in 80 percent of the more than 350 companies in which we have invested.”

But private-equity firms are primarily focused on creating wealth for investors. Sometimes that’s accomplished by growth, and increased employment. And sometimes it’s accomplished by cutting costs or eliminating poorly performing firms, resulting in job losses. So Romney has opened himself to Obama’s attacks by claiming credit for creating jobs — sometimes without justification, as we have written about before.

Private-equity firms in general have “only a modest net impact on employment,” according to a study released in September 2011 by the National Bureau of Economic Research that tracked the performance of 3,200 acquired firms and their 150,000 establishments. Bain has not said how many jobs may have been created at the 350 companies in which it has invested.

The Fall of GS Industries

The Obama campaign opened its attack on the Bain front with an ad called “Steel,” highlighting Bain’s investment in a Kansas City steel company called GS Industries.

The ad features testimonials from former employees of GS Industries, a steel company in which Bain invested in 1994 that eventually went bankrupt in 2001 and laid off 750 employees.

It begins with former 30-year steelworker Joe Soptic: “They made as much money off it as they could. And they closed it down, they filed for bankruptcy without any concern for the families or the communities.”

Jack Cobb, a steelworker for 31 years, likens Bain to “a vampire. They came in and sucked the life out of us.”

The Obama campaign ad was quickly followed by one from pro-Obama super PAC Priorities USA Action, also featuring the demise of GS Industries. The ad features another GS employee, Pat Wells, who says, “Bain Capital always made money. If we lost, they made money. If we survived, they made money. It’s as simple as that. He promised us the same things he’s promising the United States. He’ll give you the same thing he gave us. Nothing. He’ll take it all.”

In its simplest terms, it’s true that Bain made money on the GS Industries deal even though the company went bankrupt. Under Bain’s leadership, the company took on massive debt. Much of the debt was taken on to make much-needed updates to aging equipment, but some of it was also used to enrich Bain and its investors. Some analysts say the company’s large debt was a key contributor to the company’s fall. Adding to the employees’ woes, the company announced at the bankruptcy that it could not honor commitments it had made regarding pension and other benefits. So there’s no getting around that this was not Bain’s finest hour.

But, as is often the case with the Bain attacks we have seen so far, there is more to this story.

Let’s start at the start. With Romney at the helm, Bain Capital invested in the small Kansas City steel mill called GST Steel Co. in 1993. It was a company that traced its roots to 1888 but had fallen on hard times. According to the Kansas City Star, the company’s ranks had dropped from 4,500 employees in 1970 to just 1,500 employees by 1983.

In addition, the company was beset by aging equipment and faced stiff competition in a specialized market, according to a lengthy Reuters report on the company. Nonetheless, Bain saw potential in the company and, Reuters reported, invested $8 million in it. That initial investment was quickly recouped when, in 1994, the company issued $125 million in bonds and paid out $65 million in dividends —  $36.1 million of which went to Bain, according to Reuters. The following year, Bain merged the company with another in Georgetown, S.C., renaming the company GS Industries, and issued another $125 million in bonds.

Bain also reinvested an additional $16.5 million in the company, evidence that Bain intended to keep the firm going. Nevertheless, six years later, the company declared bankruptcy and eliminated 750 jobs.

It also reneged on pension and other benefits it had agreed to in 1997. The U.S. Pension Benefit Guaranty Corp. later determined the company had severely underfunded its pension, and the federal agency covered the cost of basic pension payments. So those aspects of the ads are accurate.

Was it the debt load that doomed the company? Some analysts cited by Reuters said it certainly didn’t help. Others blamed the union or competition from Asia. In a 1999 filing with the Securities and Exchange Commission, the company stated, “Distressed economic conditions in other countries, particularly Asia, have resulted in record levels of imported steel products into the domestic market causing dramatic declines in selling prices industry-wide.”

It was a very bad time in general for the steel industry in the U.S. A 2003 report from the U.S. International Trade Commission found that between 1999 and 2003, “31 steel companies producing products subject to the safeguard measures [including tariffs on foreign imports] have filed for bankruptcy protection.”

The Romney campaign also argues that the GS Industries bankruptcy and layoffs occurred after Romney had left day-to-day operations at Bain. The bankruptcy occurred in early 2001 and Romney agreed to head up the Salt Lake City Organizing Committee in February 1999. Nonetheless, the debt was incurred under Romney’s leadership.

“I take personal responsibility for making the investment,” Romney told the Boston Globe in 2002.  “But I didn’t manage these companies. Our philosophy at Bain Capital was to support management teams in companies where we saw potential for growth, or in companies that were in financial distress that we thought we might be able to save.”

That may be, but since Romney takes credit for job gains at companies Bain invested in — and which he may not have personally managed — it’s certainly fair for Romney’s opponents to tie him to Bain’s failures as well.

Again, it isn’t that the facts of the attack ads are wrong, it’s that the companies are some of the worst performers in the Bain portfolio, which includes many more success stories.

In fact, the Romney campaign countered with just such a story in an ad called “American Dream” that highlighted Bain’s minority investment in Steel Dynamics, a company that has grown and added thousands of employees.

A Plant Closing in Indiana

The Obama campaign and Priorities USA Action, the super PAC that supports the president, each recently released videos about SCM Office Supplies Inc., in Marion, Ind., which closed not long after it was purchased in 1994 by Ampad, a paper products company controlled by Bain Capital.

If it seems familiar, that’s because it is the same plant featured in the “King of Bain” mini-documentary we wrote about during the Republican primaries. That ad was put on the air by Winning Our Future, a pro-Newt Gingrich super PAC. In fact, Loris Huffman — a former union representative at SCM Office Supplies — appears in both “King of Bain” and the new Priorities USA Action TV ad, “Loris and Ampad.”

But, as we wrote before, Romney’s opponents blame him for business decisions at the Indiana plant in 1994, when Romney was on a leave from Bain Capital to run for U.S. Senate.

For example, the five-minute-plus Web video produced by the Obama campaign starts with a woman saying, “I really feel in my heart people need to know what Mitt Romney did to Marion, Ind., in 1994.” A minute into the film, which was released May 21, this text appears on the screen: “1994 Bain Capital-owned Ampad buys SCM. Mitt Romney is Bain Capital’s CEO.”

Romney, however, was doing other things in 1994. He officially announced he would run against Sen. Edward Kennedy on Feb. 2, 1994 — five months before Ampad bought SCM in July 1994 from Smith Corona. Nevertheless, the Obama campaign video shows headlines and even a company memo from July 1994, recalling how Ampad required the Indiana workers to reapply for their jobs — a move that resulted in fewer jobs and, for most of the remaining employees, lower pay and reduced benefits. The labor strike that ensued occurred in September 1994, a month before the Senate election.

So, Romney was not working at Bain during those critical early months for the plant and its workers, although that didn’t stop Kennedy from using the labor problems at Indiana plant against Romney in the 1994 campaign.

Now, it is true that Romney was back in control of Bain when Ampad closed the plant. That happened in February 1995. Marc B. Wolpow, a former managing director at Bain Capital, told the Los Angeles Times in 2007 that Romney could have prevented the plant from closing. But Wolpow, who reported directly to Romney before and after the Senate campaign, said Romney made the “right business decision” for investors to close the plant.

When Ampad went public in June 1996, the company said in its registration statement filed with the SEC that it closed the Indiana plant because it had relatively unfavorable “work rules and associated costs” compared with other Ampad facilities.

Ampad SEC filing, June 6, 1996: Work rules and associated costs at SCM’s plant in Indiana were less favorable than those at other plants of the Company. As a result of management’s effort to bring the labor agreement at the Indiana plant more in line with market labor agreements, a labor strike occurred on September 1, 1994. Consequently, the Company closed the Indiana plant on February 15, 1995 and moved the equipment to other facilities operated by the Company.

SCM was profitable before Ampad bought it. The Indiana plant had net sales of $22.8 million and a gross profit of $2.4 million between Sept. 1, 1993, and Dec. 31, 1993, Ampad’s registration statement showed. But, as a result of the strike, SCM’s net sales had fallen to $10.4 million and profits had turned to a $500,000 loss during that same period in 1994.

Nevertheless, Bain’s business decisions at that time helped Ampad to flourish.

The Mead Corp. was struggling when it decided to sell Ampad, its commercial office-products business, to Bain in 1992. On July 2, 1992, the Associated Press reported that Mead would eliminate 1,000 jobs over two to three years to save $60 million and that it would sell Ampad to Bain for an undisclosed sum. In its 1996 SEC filing, Ampad reported that sales had grown at an annual rate of 34 percent every year since 1992 under Bain control. In 1995, the company’s net sales were $617.2 million — up from $108 million in 1991.

But the company’s fast-growing sales weren’t enough. By 1999, “Ampad’s debt reached nearly $400 million, up from $11 million in 1993, according to government filings,” the Boston Globe reported. Ampad defaulted on its debt and filed for bankruptcy in January 2000. At the time, Bain owned 34.9 percent of Ampad’s stock.

The Obama and Priorities USA Action videos are correct in saying that Bain earned about $100 million on its initial investment in Ampad. The Wall Street Journal reported that Bain invested $5 million in Ampad and earned $102 million — from management and acquisition fees, as well as tens of millions from the initial public offering in 1996, as the Globe reported.

Ampad emerged from bankruptcy in 2003 and is now owned by Esselte, a global office products company.

— Robert Farley and Eugene Kiely