Ken O’Brien
I have watched with dark amusement as the debate has evolved over Mitt Romney’s tenure at Bain Capital.
In the midst of this, the residents of Southbridge should take into account their own history. It illuminates quite clearly how this issue is being clouded by those who want you to believe that they are merely defending the free market system.
As I wrote in an earlier piece, the Republican establishment is trapped in a dilemma. They have to defend an underlying philosophy of Social Darwinism which has been thoroughly discredited without acknowledging their commitment to it. To do so would be so out of synch with the values and principles of American history, culture and religion as to be toxic.
Rather the defense against the attacks mounted by their own supposed adherents (Newt Gingrich and Rick Perry) has taken two paths.
The first, and most obvious path is financial pressure. Yesterday a former major supporter of Rick Perry announced that he was switching his support to Mitt Romney as a result of Perry’s criticism of Romney’s activities at Bain Capital.
Far more insidious, however, is the second path. This is an all-out campaign to obfuscate how private equity firms operate and to convince Americans that they create jobs and are good for the economy.
I base what I am saying on my education and business experience. While a student at the Tuck School at Dartmouth I took a course in entrepreneurship from a dean of the school who had founded his own investment banking firm. While with The Continental Group I was involved in a number merger and acquisition activities. While Director of Research for the American Stock Exchange I followed numerous cases of acquisition efforts that might impact Exchange listing.
Private equity funds (i.e. venture capitalists) make money in three different ways.
The first is through investment of seed capital in start-up ventures or financing of early stage ventures. Such activities are definitely pro-job creation and very risky. As such they are indeed engines of growth.
The second is through the acquisition of companies that are in financial trouble but that can be reorganized and infused with a new strategic orientation. In such cases there are frequently layoffs as well as financial restructuring. However, the company subsequently emerges as a stronger competitive force with greater potential for growth and employment.
The third case, however, is the one that warrants review and criticism. Each of the two prior cases requires the active involvement of the private equity firm in nurturing and overseeing the development of the enterprise. As such they require the investment of time and effort – both scarce and expensive resources. In the third case, the private equity investors have no interest in the future of the business. They are focused upon the asset value of individual portions of the business.
Unlike the first two cases, this is a relatively quick and profitable way to make money. As a simple example one need only cite the purchase of unprofitable steel plants throughout the United States and the subsequent sale of their assets to be transported to China for rebuilding to compete with our domestic steel industry.
The short term profits made through such investments underwrite the “time value of money” invested in the first two types of ventures. Thus, they sustain the return on investment for participants in the private equity firm. In the meantime, those employed by these broken-up companies auctioned off for their assets are merely considered collateral damage necessary to sustain the venture firm’s operation.
This is “vulture capitalism”, and there can be no doubt that it was practiced by Bain Capital under Romney’s stewardship.
Residents of Southbridge should realize that they have been the victims of this very kind of practice. The American Optical Company was acquired by Warner Lambert. That company looted its technological assets and in the interim used it as a “cash cow” until it became unprofitable.
It was subsequently bought by a private equity firm headed by Maurice Cunniffe and Rudolph Wood in 1982 and sold off piecemeal at a profit to the investors and much to the detriment of the town.
Given these facts, stop to consider if you will buy into the talking points that are being peddled by the Republican establishment about the merits of the “free market economics” practiced by Bain Capital and their ilk.
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