“Bain Capital joined with management employees in 2000 to take over KB Toys, …. Two years later, KB executed a so-called recapitalization plan in which it took on $66 million in additional debt while using its free cash to pay $85 million to Bain and $36 million to senior managers who approved the deal. As with Ampad, Pagliuca said he again received a sum proportional to his investment. In January 2004, KB filed for bankruptcy. KB Toys has since gone through a second bankruptcy and complete liquidation.”
Link here
“If it didn’t have a penny of debt,” Pagliuca said of KB Toys, “it probably would have gone out of business.”
But here are a few pesky facts that get in the way of that statement: when Pags and Bain bought KB Toys the company, then had annual sales estimated at $1.5 billion and a year-round workforce of 13,000. Bain decisions caused the debt that brought the company to bankruptcy.
The Berkshire Eagle publishes a letter to the editor (2/3/09) from a former KB
employee on how top management made out even in bankruptcy while others
suffered:
“Ironically when KB filed Chapter 11 in Jan. 2004, some of the execs left the company and returned later with better packages than before. What about the rest of us who stuck behind KB because we believed in this company?… Many of us were let
go immediately and our insurance was discontinued the following day. We all have houses, property taxes and so on to pay as well.”
What Bain Capital and Pagliuca did to KB was so outlandish that they were sued for their actions. The opening line of the lawsuit says it all:
“This action seeks redress against Bain Capital and other defendants for fraudulently transferring $121 million from KB Toys, Inc. and its subsidiaries to themselves and their associates in April 2002, there by causing KB Toys to become insolvent. The $121 million payout and the Defendants’ other misconduct devastated KB Toys, ultimately causing hundreds of its employees to lose their jobs and costing the innocent suppliers of the KB entities hundreds of millions of dollars in unpaid bills.”
The case was settled for $27,000,000.
When Pagliuca was asked about the Ampad incident recently, he said “I’ll fight tooth-and-nail to get the accurate story out there”. Comments here
Lets hear the real story then. This whole story is very reminiscent of a scene in Goodfellas. The mob strong arms businesses into an ownership stake, then quickly suck the company dry until one day they light the place on fire to collect the insurance money. The only people screwed in both instances are the employees who are out of jobs.
I’ll admit I was initially a bit concerned by the close ties between Romney and Pags (one was Ann Coulter’s candidate of choice, the other is running as a liberal democrat). But I’m more concerned by the fact that Pags would claim that Kennedy’s response to the Ampad fiasco was inappropriate or misleading. Was it wrong of Kennedy to point out that Bain’s aggressive business tactics had cost thousands of workers their jobs? I’d argue that not only was it a perfectly accurate portrayal, but it showed Kennedy’s commitment to protecting the working class and standing up to corporate interests. If anything says profits over people, it’s what happened between Bain and Ampad.
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p>It’s disturbing that Bain would walk away with sizeable profits while slashing jobs and benefits and leaving these companies doomed to bankruptcy
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p>I don’t know. Hard to consider Pags a friend of the working class after hearing this.
After all, he was only accusing them of indifference to the employees of Ampad, not fraud. It just goes to show there’s a huge grey area where certain business activities are legal, but still resemble crimes, as the diarist noted.
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p>If you went to Vegas, won big while playing with house money, then left without paying off the house, you’d soon be sleeping with the fishes.
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p>Seems to me that properly taxing short-term capital gains and individual incomes ($400 million over 30 years is $13 million a year) would not only solve some of the nation’s fiscal problems, but dry up the incentive to make a killing from these vampire-like deals. If Pagliuca gets to the Senate, can he be counted on to sponsor a bill restoring the %90 marginal tax rate? Yeah, right.
As is so often the case, when you tell these kinds of stories in plain English, the ugly truth is revealed. Much of the language of investment (and business reporting) is devoted to obscuring what is really going on.
I’m interested to hear the “accurate story” that Pags so desperately wants to get out there, but honestly, if Pagliuca and Bain Partners didn’t do anything wrong, then why did they settle this case for $27 million dollars? Shady business practices seem to pay off though. $27 million is pocket change to guys like Pagliuca and Romney.
Settling doesn’t imply guilt. It implies risk aversion.
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p>If Pags et al decided there was a chance of a far less favorable decision, they took the risk averse policy.
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p>Think of it in this overly simplistic way: say Pags thought there was a 20% chance that they’d have to pay $150M, and an 80% chance they’d have to pay $0. If they get into this situation five times, on average they pay out $30M each. So, paying out $27M instead saves them a few million, and doesn’t put them in the position of a single bad decision wiping out all their cash.
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p>It’s the same reason why some people who are innocent of murder — or who believe they might be able to convince a jury that they’re not guilty — accept plea bargains for a lesser crime.
we have compared Pagliuca to a mobster and an accused murderer who takes a deal for manslaughter. Interesting. I like Republican better.
This would still be discouraging if Ampad or KB toys had been isolated incidents. But this article suggests otherwise–it seems Bain made a habit of predatory buyouts that ended in bankruptcy or mass layoffs.
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p>To quote the article, “Stage Stores, DDi, KB Toys, Babbages, Holson-Burnes, Dade-Behring – they all collapsed. But by the time they did, Romney and his team had already made money for themselves, their investors, their executive teams, and their bankers, legal consultants, and accountants.”
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p>Bain has left a trail of bankrupt companies and laid-off employees in its wake, but neither Romney or Pagliuca seem to care, as long as they’re reaping the benefits.
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p>This doesn’t sound like “an inaccurate picture” to me. It sounds like an established pattern and a disregard for the well-being of thousands of working people.