Monday, June 4, 2012

Dade Behring and Mitt Romney: Part II

Last August I wrote about my experiences with Dade Behring, Inc. (, which at the time was a Bain Capital portfolio company. My conclusion: the ultimate success of the company, through a debt-for-equity swap and IPO that brought investors handsome returns and a stronger company, made it a poor example of Bain’s buy-and-loot strategy. In subsequent months, as other details about the company were disclosed while Mitt Romney continues his farcical claim that he’s a businessman who knows how to create jobs, I’ve concluded the Dade Behring story is a perfect example of one of Romney’s greatest traits: hypocrisy. It’s a tale of too much borrowing and government subsidies, which supposedly are an anathema to the sudden conservative Mr. Romney.

As noted in the earlier post, Dade Behring repurchased approximately $400 million of its privately owned stock from Bain Capital and Goldman Sachs in 1999, resulting in a four-fold return on investment in five years. The company’s debt rose to $902 million from $373 million in one year. In addition, the transaction was just small enough to avoid triggering a dividend payment to the other shareholders, a fact I verified with management after an inquiry from Barron’s. One report states the company turned down an almost $2 billion offer from Kohlberg Kravis Roberts as insufficient before initiating the stock buyback. They were able to do this because, despite reducing their ownership to 32 percent as part of the stock buyback, Bain/Goldman still retained voting control of Dade Behring.

There were some interesting executive dynamics at the company during this period. In a news release in November 1997, Dade Behring announced that CEO Scott Garrett (disclosure: I represented Garrett in a subsequent business venture) “elected to resign” his position. Garrett has been quoted that Romney was more involved in the day-to-day business of the portfolio companies than has been stated publicly. My assignment with Dade Behring came through the late Phil Smith, who worked with Garrett and other Dade Behring executives at American Hospital Supply before its purchase by Baxter. I asked Phil if he knew why Garrett “left” the company and if he did, would he tell me. Phil said he didn’t know and doubted anybody outside Dade Behring knew either.

Bain’s fingerprints are all over the stock-buyback transaction. Steve Barnes, Garrett’s replacement as CEO, had been an executive vice president at Bain Capital before joining Dade Behring as chief operating officer in 1996. He is now a top Bain Capital executive. Barnes has been quoted that transaction was done for sound business reasons. As I wrote earlier, my question-and-answer document prepared in advance of announcing the buyback asked the same such question and received the same answer. Let’s just say I hardly find Barnes to have been an unbiased observer. Conversely, I’m not sure why the company needed this transaction because it had an extremely strong team of up-and-coming executives, including Jim Reid-Anderson, who as CEO of the public company after Bain’s exit led its return to profitability and successful sale, and Marc Casper (disclosure: Kendro Laboratory Products was a client while Casper was CEO), now CEO of Thermo Fisher Scientific, Inc., a $12 billion medical instruments company.

I am therefore surer of my earlier conclusion that this was not simply a miscalculation by the numbers crunchers back at Bain Capital. This was wealth creation, pure and simple. Bain and Goldman couldn’t sell Dade Behring for what it thought was an acceptable return or take it public, so it simply loaded it up with debt (about one times annual sales), pocketed a huge ROI and let the chips fall. Romney’s “I know how to run a business” mantra doesn’t include making somebody else pay for his piece of tomorrow, you can bet on that.

The other area of hypocrisy is federal tax incentives. In 1996, according to the Tampa Bay Times, Dade Behring received two tax breaks totaling $7.1 million for job creation at its Puerto Rico facility. Some workers relocated from Miami as part of the deal. Dade Behring proceeded to close the facility just one year later, throwing 850 people out of work. Romney rails against the stimulus and other federal job-creation programs, while supporting state grants for business. Not only did he lie about Obama donors benefiting from the subsidies to Solyndra, but Bain Capital used – and abused – subsidies for Dade Behring. Romney turned a job-creating program into a job-destroying one.

We can expect to see more examples of Romney’s policy hypocrisy in the coming months. The Obama campaign is already hammering away at his job creation record, both at Bain and as governor of Massachusetts. It should also take a look at his aversion to adding to the deficit. He did a great job of doing that for Dade Behring.