By Jesse Marx
By Chris Parker
By Jake Rossen
By Jesse Marx
By Michelle LeBow
By Alleen Brown
By Maggie LaMaack
By CP Staff
Just a few months after being hammered by Kennedy, he set fire to another company.
The Price of Incompetence
The move was classic Bain. Before buying Georgetown, Romney had purchased the Armco steel mill in Kansas City, which had been in business for more than 100 years.
"We were setting a lot of records for production at that time," says employee Steve Morrow. "We were making a lot of money, because we were getting profit sharing."
Bain combined Armco with the mill in Georgetown and foundries in Tempe, Arizona, and Duluth, Minnesota, to form the newly christened GS Industries.
Romney purchased Armco with just $8 million down, borrowing the rest of the $75 million price tag. Then he issued bonds — basically I.O.U.s — to borrow even more to pay himself and his investors $36 million.
Within a year, he'd already made four times his initial investment while barely lifting a finger. But he'd also run up a staggering $378 million in debt on GSI's tab.
Steel is an infamously cyclical business, a worldwide commodity prone to the same wild price fluctuations as oil. The Kansas City plant forged parts for equipment used in mining gold and copper, leaving it susceptible to the instability of those markets as well.
Yet the smartest guys in the room thought they could run the plant better than the people setting production records.
"They were getting rid of old managers and hiring new managers that didn't have any steel experience," says Morrow. "Some of the guys were nice guys and everything, but they didn't have a clue what was going on."
Many of the new supervisors were ex-military, people who believed that grown men and women are best motivated by punishment. Before Bain, says Morrow, "everybody got along."
Afterward? "They wanted to run the plant like a disciplinary environment. They wanted to discipline people for getting hurt on the job. They wanted to put us in an environment like a war, where we were always fighting with them."
Romney was charging GSI $900,000 a year in management fees to run the company. The Kansas City mill received $900,000 worth of ineptitude in return.
Although Bain borrowed $97 million to retool the plant so it could also produce wire rods, it left the rest of the facility to rot.
To save costs, Bain went miserly on everything from maintenance to spare parts and earplugs. Equipment deteriorated. Since the new managers didn't know how to repair it, "they'd want to rent a new piece of equipment out instead of maintaining what we had," says Morrow. The waste and inefficiency was breathtaking.
Bain's plan all along was to streamline the company into greater profitability, then reap the rewards with a public stock offering. But the exact opposite was happening. Even Roger Regelbrugge, whom Bain installed as CEO, knew the debt was crushing GSI from within, according to Reuters. If a public offering didn't materialize, the company would collapse.
Steel was about to enter a periodic downturn. Countries around the world were locked in a war of tariffs and government-subsidized production, creating a glut and driving down prices. Romney's strategy of the flip was never meant to endure difficult times.
Workers saw the end coming; they were particularly worried that Bain was badly underfunding their pension plan. So they went on strike in 1997, bringing a traditional Rust Belt flair to the festivities by littering the streets with nails and gunning bottle rockets at security guards.
When it was all over, the steelworkers' union agreed to wage and vacation cuts in exchange for extra health and pension safeguards should the plant close.
Yet GSI was now hemorrhaging money, says David Foster, the union official who negotiated the deal. He claims that Bain cursed the company by placing its own interests above those of customers and long-term stability.
"Like a lot of private equity firms, Bain managed the company for financial results, not production results," says Foster. "It didn't invest in maintenance or immediate customer needs. All that came second to meeting monthly financial goals."
It would take a few more years of bleeding, but GSI eventually fell to bankruptcy.
The Kansas City mill closed for good; 750 people lost their jobs. Worse, Romney had shorted their pension fund by $44 million. The feds were forced to cover the difference, while workers saw their benefits slashed in bankruptcy court.
The battered Georgetown plant and the foundries in Arizona and Minnesota ultimately were bought out of bankruptcy by new companies. Their workforces were halved.
Still, Romney walked away unbruised. All that debt was technically GSI's, not Bain's. Because he'd repaid himself and his investors just months after the purchase, Romney pocketed millions for running the company into the ground.
"They were clever and ruthless enough to pay their own investors back at a really high return rate," says Foster.
This was the beauty of Romney's racket. Even if he killed a company — and he tended to kill them fairly often — he still made out, leaving others to take the hit.
On the campaign trail, Romney describes his work at Bain as resurrecting distressed companies. In this version, he's the white knight lifting troubled firms from the precipice of failure.