Finders Weepers: Early Bain Disputes Cast New Light on Its Business

by Jesse Eisinger ProPublica, Sept. 11, 2012

It was one of the "quickest big hits in Wall Street history," as the Wall Street Journal put it at the time.

In 1996, an investment group including Bain Capital, the firm then run by Republican presidential candidate Mitt Romney, sold the consumer credit information business Experian to a British retailer, making a $500 million profit. Bain and the other investors who reaped that windfall had closed the acquisition a mere seven weeks earlier, stunning the investing world.

Another party was stunned by the deal, but for a different reason. James McCall Springer believed that he had brought the idea to buy Experian to Bain in the first place.

Springer sued to get what he contended was his rightful finder's fee, eventually settling. And he wasn't the only one. At least three other parties had similar legal disputes with Bain during the early 1990s, when Romney led the company, raising questions of how rough-and-tumble the company could be. The suits also shed light on how Bain actually operated, complicating one of the main narratives Bain, the Romney campaign, and many commentators have used to describe the private equity firm.

The Romney campaign declined to respond to a request for comment on the lawsuits. Bain did not respond to a request for comment. And, of course, disputes about finder's fees are not uncommon; large sums are at stake for little work, a situation ripe for claims of aggrandized roles.

Most accounts of Bain characterize the firm as full of hard-working young men who sought to find troubled companies, invest in them and turn them around. Romney's presidential campaign website says that "under his leadership, Bain Capital helped to launch or rebuild over one hundred companies." Romney campaigns have embraced his reputation as a turnaround artist, as he has run on his private equity record and his overhaul of the 2002 Salt Lake City Olympics. He even titled his 2004 book "Turnaround," a memoir and account of the 2002 Salt Lake City Olympics.

But as the disputes illuminate, the reality of Bain's business in the early years is more complicated.

Often, Bain wasn't finding companies on its own. Finders and middlemen were more common in the early days of private equity than they are now. Smaller firms would seek out acquisition targets and bring them to the big buyout firms.

More significantly, Romney's firm wasn't always looking for startups or troubled companies that it could turn around.

Private equity companies conduct a variety of transactions other than buying startups with growth potential or troubled firms ripe for a turnaround. Some seek out family-run operations under the theory that those typically have a lot of fat to cut. Some like "roll-ups," buying up a bunch of small operations in one industry and combining them into a powerhouse with economies of scale. Firms buy divisions of large corporations that are trying to streamline their operations. Some acquisitions fit more than one of these descriptions. The constant is debt, and plenty of it. Private equity firms use such borrowed money to maximize their gains.

The Romney campaign says Bain did various types of deals. And it celebrates that Bain helped launch or rebuild some American corporate stalwarts, like Staples, Bright Horizons and Sports Authority.

Yet in addition, under Romney's tenure, Bain often sought out solid businesses that didn't need to be turned around. The reason: Such companies could operate under the burden of the enormous debt that Bain would layer on them.

"They always told us day one: They wanted profitable companies that are doing OK, and they pay what they needed to pay," says Phillip Roman, who heads up an eponymous mergers and acquisitions firm that was involved in a legal dispute with Bain in the 1990s similar to McCall Springer's. "There are companies that like turnarounds," referring to other private equity firms. "That's another business" from the one Bain was in.

Bain in the 1990s was "doing more [of] the usual leveraged buyout: Buy with a lot of debt, try to increase earnings and sell as soon as possible," says Ludovic Phalippou, an expert on private equity at the University of Oxford in England. The firm was seeking "mature companies with high cash flow," he says, with sufficiently stable earnings "to be able to leverage a lot."

Financial data on many of Bain's acquisitions are not available, since they were private transactions. But there are several examples of companies that Bain took over that were established and seem to have had enough revenue to support leverage. Bain and another firm bought what they would name Masland Holdings, a maker of automobile carpeting and insulation, from Burlington Industries in 1991. Masland had $305 million in sales that year, according to Dun & Bradstreet. The firms took it public in 1993. Duane Reade was a successful family-run business with revenue of $225 million when Bain bought it in 1992, according to the Wall Street Journal, and sold it five years later.

Early on, in 1986, Bain formed Accuride to purchase the wheel-making division of Firestone Tire & Rubber, with some executives from the company. Bain structured the deal to have 40-to-1 leverage, according to the Los Angeles Times, meaning Bain and its co-investors put an enormous amount of debt on Accuride for every dollar they invested. Accuride had sales of $215 million in its fiscal 1986, according to the Wall Street Journal. Accuride was sold within a year and a half, earning Bain more than 20 times its original investment, according to the Times. (Bain revamped production and restructured executive compensation at the company, according to a case study by a Bain partner, cited by the Boston Globe.)

"I didn't want to invest in start-ups where the success of the enterprise depended upon something that was out of our control," Romney was quoted as saying in the Boston Globe in 2007.

The Wall Street Journal found that many of the businesses Bain bought went bust, even when Bain reaped big financial wins. The paper analyzed 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, finding that 22 percent either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested. An additional 8 percent ran into so much trouble that all of the money Bain invested was lost. But overall, the hits more than made up for the losses, and Bain recorded 50 percent to 80 percent annual gains in the period, the paper found.

For a private equity firm, choosing the right company to buy is critical, which is where firms such as McCall Springer came in.

In February 1996, Springer, who runs a small investment firm in Los Angeles, woke up to press accounts that Bain and another Boston-based private-equity company, Thomas H. Lee & Co., were in talks to acquire the business that today is known as Experian. Alarmed, he fired off a letter to Adam Kirsch, a managing director of Bain Capital. "As you are aware," Springer wrote on Feb. 9, 1996, his firm "brought each of you the idea and reasons for acquiring TRW ISS/REDI," as Experian was then called.

"We provided you detailed business and strategic plans, company organization and cost structures, management tendencies and requirements, competitive and customer market investigations, emerging market opportunities, new or improved product and service opportunities," Springer wrote in a letter that is an exhibit in a legal fight from that time.

Springer followed up that on Feb. 12, with a second letter to top officials of Bain and Thomas H. Lee. The top addressee: Mitt Romney.

Springer reminded Bain, as well as others involved in the deal, that McCall Springer had written agreements with each party, which he claimed acknowledged that Springer had brought the idea to them a couple of years earlier.

Instead of paying up, Bain brought legal action against McCall Springer. Romney's private equity firm sought a declaratory judgment, a legal strategy to seek a quick resolution of a matter, often in a jurisdiction of your choosing. McCall Springer countersued, alleging it was owed equity and management rights in the deal and seeking punitive damages. In the end, Bain entered into an undisclosed settlement.

During the period that Mitt Romney was actively running Bain during the 1990s, Bain had at least three other legal disputes that were similar to the fight with McCall Springer. In each case, a party claimed it was owed money for having brought Bain an idea for an acquisition. When Bain carried out the acquisition, the firm didn't pay the contractually obligated fee, according to the claims.

Bain fought each in court, arguing that the agreements it had with the parties didn't cover the specific circumstances of the deals.

The Experian deal was a headline grabbing success for Bain, which was formed in 1984. Great Universal Stores, the British retailer, agreed in November 1996 to buy Experian for $1.7 billion. Bain and Thomas H. Lee had agreed to pay just over $1 billion in February, but had only closed the deal in September.

Private equity firms often claim that they develop companies, helping them to grow more quickly and professionally. The added value that the private equity owners contributed to Experian in a mere seven weeks, however, was minimal.

Bain and Thomas H. Lee turned their $100 million investments into $300 million each, a spectacular return in such a short period. (The rest of the profit went to other investors, including Experian management and TRW for its remaining stake.)

Eventually, Bain settled with Springer. Brokers and finders learned to craft their agreements more stringently, they say. "If you don't have a really good agreement, you will be eviscerated in some shape or form," a person familiar with the dispute says.

Phillip Roman had a similar dispute with Bain in the early 1990s.

In September 1994, Phillip Roman & Co. took Bain to court in the Commonwealth of Massachusetts, filing a complaint for declaratory and injunctive relief. Roman claimed Bain had failed to pay it a finder's fee of $4.3 million for Bain's takeover of Weider Health and Fitness, a health food and fitness equipment business.

The M&A firm claimed in its suit that it had signed an agreement with Bain in 1990 and brought Weider to the attention of Bain partner Geoffrey Rehnert in January 1993. Bain eventually bought Weider for $390 million. The problem for Roman was that Bain had thrown it over for another finder firm, according to the complaint.

The firms settled the case in December of the same year.

Asked if he felt angry with Bain about the dispute, he said: "At that moment I did. Everybody feels that way when they think they've been screwed."

But his firm worked with Bain subsequently on deals and received fees without issue. Today, "I have no ill feeling at all, not even close," he says.

Roman added that he had great respect for Bain and its high standards. The companies the firm bought "had to be like nuns," he said.

In a third case, in November 1992, John Ewing, who had a firm called J.G. Ewing & Associates, approached Bain to pitch it an acquisition of the engineering and design firm Professional Service Industries, Inc. The two sides made an agreement with each other.

Shortly after, PSI's parent hired the investment bank PaineWebber to auction off the company.

About a year later, Bain bought PSI, but didn't pay Ewing. Ewing read about the pending deal in the newspaper. His lawyer contacted Bain, arguing that the firm wouldn't have known about the company if Ewing hadn't introduced it to the private equity firm, and pointing out that the parties had an agreement with each other.

Bain partner Rehnert wrote to John Ewing, saying it wouldn't pay the fee. Bain is "not willing to pay a fee to a broker when an investment bank has been engaged to conduct an auction since bringing such a deal to our attention creates no value," the Bain partner wrote to Ewing, according to a letter from Ewing's lawyer to Bain.

Bain sued Ewing in U.S District Court in Massachusetts, seeking declaratory judgment. Ewing countersued for $1.4 million. The case was dismissed voluntarily in February 1995, an outcome that generally indicates the parties settled.

In the final instance, the son of the owner of Anthony Crane, a crane company that Bain took over, claimed that he had brought Bain information that another crane company was willing to sell itself to Bain. He claimed a finder's fee, which Bain disputed. That case too appears to have been settled.

Paul Kiel contributed to this story.