Creative Destruction - Job Creator or Vulture Capitalist?

Mitt Romney believe his track record at Bain capital places him in the good graces of our country as a job creator; hardly.

Let me first report that I am in full support of free market systems. I believe in competition for most, but not all industries. And as a business owner I am fully aware and factually realistic about product, service profitability and life cycles (Introduction, Growth, Maturity, Decline).

The fact is that organizations sometimes blunder, lapse and misjudge; they fail to capture opportunities, fail to imitate imitable resources, fail to solve solvable problems, and fail to execute fundamental strategies. See a resource based view of a firm HERE!

A disadvantage of competition can be the loss of local jobs, particularly in the manufacturing industry. As competition pushes prices of goods down firms may move offshore in search of cheaper labor in order to stay competitive. This can lead to some firms exploiting people in less developed countries and in extreme cases even child and or slave labor.

As I stated before, some industries do not lend themselves to competition. The main example commonly used is the supply of water to residential homes. It does not make sense to have multiple sets of pipes running to each home. In an industry such as this it is cheaper to have a monopoly firm, regulated by government to insure fair price and a minimal level of service.

When products and services of businesses are lost to bankruptcy and the closing of doors occurs. People loose their jobs, investors usually loose all the money the they have invested in the enterprise, and bond holders along with secured creditors receive proceeds from the dissolution of the business assets after closing the purchase of the business. This return usually represents only pennies on the money or credit extended to the failed business .

Back to Mitt Romney and Bain Capital, taking control of any company which is failing due to competitive disadvantages.

In all cases they take control to make money for their firm, which like other ventures invests capital to make a profit; seeking a specific return on their investment. It has been said that their success has brought 88% annual returns for Bain Capital.

Bain Capital seeks out opportunities to acquire companies where by adding their efforts and talents they will be able to increase the value of the company to the point where they can realize the increased value by selling the company or its assets.

This means they seek to step into a failing company if they can dispose of or renegotiate debt. Then they take control of the company, layoff/fire workers,cut wages, benefits and other expenses. The seek tax subsidy abatement and breaks from federal, state, and/or local government and sell assets to make the organizations balance sheet and cash flow appear more attractive. During this period Bain Capital is negotiating with state and local government entities seeking tax relief for their operations.

Acquired companies are normally bought with high leverage, borrowed funds which reduce the Bain Capital risk profile. Bain Capital normally seeks receipt of cash distribution immediately upon closing the purchase of the business, a portion of its investment in the purchase price, reducing its own investment and enhancing its return on the investment left in the business.

A sale can be made to another company, frequently a much larger one in a related field, to another private equity fund which believes it can create even more value for its own investors, or in a public offering to a broad group of shareholders.

Sometimes the Bain Capital acquisition  is leveraged with so much debt that the business is unable to  pay the carrying costs of the debt. And the debtors take control of the business or the company is placed in bankruptcy proceedings either to liquidate its assets to pay off the debt or to restructure, the process where Bain Capital actually entered the picture in the first place.

Either way, Mitt Romney and Bain Capital do not have job creation anywhere near the top of their goals and objectives for maximizing total return for their investors.

This process is all about Bain Capital extracting cash from a business which has or is failing due to any number of reasons.

It is not unfair to view Bain Capital in equivalence with Vultures on the African Continent Plains.