Sunday, January 15, 2012

WaPost Hit Piece on Romney at Bain

Now isn't this special?  William D. Cohan, a writer for Bloomberg and troubadour of Wall Street inside stories, has penned an editorial in this morning's Washington Post in which he says (among other things) the following:

"Yet, there is another version of the Bain way that I experienced personally during my 17 years as a deal-adviser on Wall Street: Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching Wall Street bankers to get its hands on the companies that provided the raw material for its financial alchemy. Other private-equity firms I worked with extensively over the years — Forstmann Little, KKR, TPG and the Carlyle Group, among them — never dared attempt the audacious strategy that Bain partners employed with great alacrity and little shame.

Call it the real Bain way.  Here’s how it worked. Private-equity firms are always eager to find companies to buy, allowing them to invest chunks of the billions of dollars entrusted to them and from which they earn hundreds of millions in fees. One ready source of these businesses is Wall Street bankers hired to sell companies through private auctions. The good news is that when a banker puts together a detailed selling memorandum about a company, chances are very high that company will be sold; the bad news is that these private auctions tend to be very competitive, and the winning bidder, by definition, is most often the one willing to pay the most. By paying the highest price, you win the company, but you also may reduce the returns you can generate for your investors.
I never negotiated directly with Romney; he was too high-level for any interaction with me. Rather, I dealt often with other Bain senior partners, who were very much in his mold. In my experience, Bain Capital did all that it could to game the system by consistently offering the highest prices during the early rounds of bidding — only to try to low-ball the price after it had weeded out competitors.

So let's break this down, shall we?   First of all, the headline to the piece speaks of Romney's word not being "....his bond" and Cohan writes as much in his closing.  Yet Cohan admits in his piece to never dealing directly with Romney.

Cohan does a reasonable job in laying out the process that connected him (as an adviser to Wall Street banks) and Bain (looking to do private equity deals), a process that includes early rounds of bidding in which the company being sought for purchase and its lawyers "weed out" private equity firms not able to meet their idea of price.  Critical to this round of bargaining is that the PE firms have not had access to in-depth information about the company--something Cohan explains thusly:  "By bidding high early, Bain would win a coveted spot in the later rounds of the auction, when greater information about the company for sale is shared and the number of competitors is reduced. (A banker and his client generally allow only the potential buyers with the highest bids into the later rounds; after all, you can’t have an endless procession of Savile Row-suited businessmen traipsing through a manufacturing plant if you want to keep a possible sale under wraps.)"  What this? I'm shocked, shocked there's capitalism going on in here.  

What Cohan reveals here are the inherent tensions in a capitalist exchange.  He was trying to get the highest price for the companies being sold, in order to deliver the greatest return to the bankers involved.  Romney was trying to get the lowest price for the company, in order to return value to HIS investors.  In the middle, is a transaction, freely entered into by two parties with the ability to walk away at any point in the process.  Bain would have been guilty of financial misconduct were it not to lower its bidding price as more information came available to indicate the value of the company in question.  If this were a Bain strategy, than presumably if it weren't successful in determining a truer market value of the company for sale, the market would have punished Bain, more people would have done what Cohan did in 2004--as is recounted here: "  By the end of my days on Wall Street in 2004, I found the real Bain way so counterproductive that I no longer included Bain Capital on my buyer’s lists of private-equity firms for a company I was selling."

But the market did not punish Bain for its strategy.  It rewarded it.  And Cohan left Wall Street to become a writer.  Wall Street valued what it Cohan refers to here:  " But Bain Capital took the art of negotiation over price into the scientific realm."Yes Mr. Cohan--after the negotiation entered the realm of truly fair negotiation, where both buyer and seller had the opportunity to reach a price based on sufficient information, Bain scientifically and painstakingly analyzed what the business was really worth--and bid accordingly.  Cohan makes a great show of how disruptive it would have been for the parties on the sell side to walk away, but this is simple hogwash. It happens all the time.  This accounts in no small part for the number of lawyers on Wall Street.

One would have thought though, that Mr. Cohan's clear revulsion with Romney would have been manifest with his decision in 2004 to pass on any deals with Bain.  Yet a (ridiculously easy) Google search of Mr. Cohan's political contributions over the past few years reveals that although he has heavily favored Democrats (including President Obama for the full $2500 in this cycle), he made a $1000 donation to Romney in 2007.  How can this be, Mr. Cohan?  Have you all of a sudden come to conclude that Romney might bait and switch the Congress,  or the Chinese?  Had you not reached these conclusions in 2007?  Or is the answer closer to a case of the shoe being on the other foot--Cohan looking to implement a "win-at-any-cost" strategy of his own in support of the President's re-election?

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