August 18, 2012
-- by Dave Johnson
A look at one of Bain Capital's first deals shows a get-rich-quick-at-everyone-else's-expense pattern forming: borrow heavily, gut assets, cut wages, cut safety, crush unions, restructure for tax avoidance and sell with a sweetheart, insider deal. That pattern foreshadowed what happened to our jobs, communities, industries, economy and country since the early 1980s. An already-wealthy few got fantastically rich(er) and the rest of us paid the price.
A Financial Times Investigation
In FT investigation: Romney’s take-off the Financial Times (FT) investigated the $5 million buyout of Key Airlines, a "formative" deal from Mitt Romney's company Bain Capital's early years.
At the time Mitt Romney was at the consultant firm Bain & Company, and heard that Key Airlines was looking to be bought. Key Airlines had a $10 million per year government contract to shuttle pilots and support workers between Las Vegas and "Area 52," where they were working on the then-secret F-117A stealth fighter. Romney formed Bain Capital in part to buy the airline. T. Coleman Andrews III, a former White House official recruited to Bain by Romney led the buyout for Bain and chaired its board of directors.
The Financial Times investigation showed how the purchase of Key Airlines helped establish the company's method of doing business. They bought the company by borrowing all the money needed, 100% debt-financed, meaning Romney and Bain put up no money -- and very little risk -- of their own. They "restructured" the company; according to FT, "Bain also reshaped Key Airlines, turning it from a profitable, taxpaying company with a $13m balance sheet and its own aircraft, into an operating company with a $2m balance sheet and a holding company from which it sold assets separately."
When the pilots tried to start a union, the company unlawfully suppressed the effort with what a federal judge called "blatant, grievous, wilful, deliberate and repeated violations."
No-Risk Leveraged Purchase
One of the ways private-equity companies make money is by borrowing using the purchased company's assets as collateral, and passing some or all of the borrowed money to themselves. Romney and Bain purchased Key Airlines by securing a $5 million loan with $2.5 million worth of aircraft owned by the company, and a $2 million guarantee of their own. In other words, they borrowed money to buy the company by promising the lender they would put up the company's assets as collateral. (The company had a $10 million per year government contract.)
The bank lent the money with part of it personally guaranteed after satisfying themselves that the investors were worth enough money. In other words, they could finance a debt-only deal because they were already rich.
Restructuring To Avoid Taxes
When purchased, Key Airlines was making money and paying taxes. By borrowing, the company incurred debt servicing costs, which are deductible against taxes. The company also restructured in ways that cut taxes. According to FT, "Bain also reshaped Key Airlines, turning it from a profitable, taxpaying company with a $13m balance sheet and its own aircraft, into an operating company with a $2m balance sheet and a holding company from which it sold assets separately."
Crushing The Union
Private equity companies cut costs. If you are not rich and have to work for a living, you are one of those "costs" that has to be cut. Your pay or your job are in the way of someone making a whole lot of money. Another "cost" to cut is the work environment. Worker safety can cost money, so it is one more thing that is in the way of someone making a whole lot of money. Providing a good, reliable product is another "cost" that is in the way of someone making a whole lot of money, and in an airline that "cost" is safe, well-maintained airplanes.
In 1985 a majority of Key's pilots tried to form a union. According to FT, "the pilots cited safety concerns; management said that the pilots were unhappy because of their low pay."
Bain was getting ready to sell the airline, and the worst thing that could happen to them would be a union, which could demand fair pay, worker safety and better maintenance and air safety procedures. Crushing the union -- keeping pay low, and being able to ignore pleas for safer conditions for workers and passengers -- would mean the Bain investors would make a lot of money. So they crushed the union.
According to FT,
There followed an unlawful attempt by Mr Andrews and Key management, in the words of District Court judge Roger Foley, “to stamp out any cockpit crew members’ union before it could come into being”.
In January 1986, Mr Andrews and Olen Rae Goodwin, interim president of the union, met in the Key Airlines trailer at Nellis. The court ruled that Mr Andrews had then “threatened [Mr] Goodwin’s job and he threatened to leave Key, and that the management team would also leave. He threatened to sell Key”.
A court later found that Key's management had illegally suppressed the union, and awarded $500,000 in punitive damages.
Labor bosses: When asked about this recently Romney had this to say,
“President Obama continues to put the interests of labour bosses ahead of the interests of Americans looking for work. By contrast, Governor Romney has grown companies and created jobs, in the private sector and as governor of Massachusetts, and will get America working again,” said Michele Davis, a spokeswoman.
"Blatant, grievous, wilful, deliberate and repeated violations": Another FT story, Romney link to union suppression ruling explains further,
“The anti-union activities in this case are not merely unfair labour practices as Key argues, but blatant, grievous, wilful, deliberate and repeated violations of the Railway Labour Act,” Roger Foley, federal judge for the District of Nevada, wrote in 1992, in a case brought by two Key pilots.
That's how a federal judge worded it. (Note how a case that started in 85 takes till 92 to get a ruling.) This is what the airline had done:
According to the court ruling, Key held coercive meetings with pilots; said management would leave and the company lose contracts; and told pilots that salaries, bonuses and benefits could be frozen. Federal labour law forbids an airline “to interfere in any way with the organisation of its employees”.
Sold For A Lot
The once-profitable company was struggling, losing money, had only $2 million in assets -- down from $13 million when Bain bought it -- and had just avoided (illegally suppressed) unionization. But Bain was able to sell part of it to Presidential Airways-- a company in which Bain was also an investor, with Andrews on its Board -- for $18 million. They sold other parts of the company for further profit. The Bain partners got rich(er).
According to FT
In the final analysis, it is hard to say whether Bain Capital was good or bad for Key Airlines.
The operating company had higher sales, was more focused, more efficient and employed more people by the time that Bain sold out.
On the other hand, it was also more fragile, with only one line of business, net losses and a weak balance sheet.
So a look at Bain Capital's early, "formative" years tell us a lot about what has happened to our country, and our jobs, and our economy. This was the beginning of a pattern of Bain-ization that swept through the economy. Good jobs were replaced with low-wage, insecure jobs. They used various schemes to avoid taxes. They suppressed unions. They gutted the assets of good companies. They cut costs (us) and cut costs (safety) and cut costs (product quality) and cut costs (customer support) and cut corners and cut We, the People out of the equation.
Posted by Dave Johnson at August 18, 2012 8:20 AM
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