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Steel Dynamics Inc
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Randy Johnson organizes steel workers for a living. Before that he worked in a paper factory where he served as union steward. He has waved picket line placards, bellowed through bullhorns, and taken people out on strike. Along the way, he became Mitt Romney’s worst recurring nightmare.
At his bungalow in a working-class town near Pittsburgh, sitting on a chocolate-brown leather couch in the living room, Johnson displays the mild manner of a back-office accountant. He wears gold-rimmed glasses, a pale blue dress shirt, neatly pressed chinos, and black football coach’s shoes. “Let me show you something,” Johnson says, rising to get his “Romney box,” a copier-paper carton he’s kept since 1994. “She’s tried to get me to get rid of the box,” he says, nodding toward his wife, Rita, who smiles tolerantly. “I won’t do it.”
Photograph by Mark Mahaney
The box contains records of a long-ago chapter in the history of Bain Capital, the Boston investment firm Romney led from 1984 to 1999. Back in 1992, Bain acquired a manufacturer called American Pad & Paper, or Ampad. Bain then used Ampad as a vehicle to buy and restructure similar companies. Following standard “roll-up” strategy, Bain closed factories and laid off workers in anticipation of selling off a leaner, more profitable company via an initial public stock offering.
Two years into the roll up, Bain had Ampad acquire an office supplies plant in Marion, Ind., a manufacturing town 70 miles northeast of Indianapolis. At the time, Johnson worked the night shift making hanging files. “We come back from the July 4th holiday, and this is what we find posted,” Johnson says, producing from the Romney box a one-page notice: “As of 3 p.m. today, July 5, 1994, your employment with SCM Office Supplies Inc. will end.” Most of the 258 employees were allowed to reapply for jobs at reduced wages and benefits. Johnson’s pay fell 22 percent, he says, from $10.05 an hour to $7.88. Dismayed to see their old union contract torn up, the Marion workers negotiated with Ampad management for several months, then called a risky strike. In early 1995, Ampad called the union’s bluff, closed the plant, and laid off the remaining workers.
“None of what happened in Marion in the 1990s would be very interesting,” Johnson notes, “if Mitt Romney had not built his entire political career on the claim that he’s a job creator.” By the same token, Johnson wouldn’t have become a character actor in the 2012 Presidential drama had Romney’s conduct not drawn the union man to the spotlight 18 years earlier. On and off since 1994, when the former Massachusetts businessman made his first run for public office, seeking to unseat Democratic Senator Edward M. Kennedy, Johnson has haunted Romney. During the hard-fought Senate race, Johnson led a “truth squad” of Marion workers who drove overnight to Boston to confront Romney. Kennedy’s campaign, recognizing a gift from the political gods, made a series of television commercials starring the unhappy Marion workers. The ads helped Kennedy pull out of a temporary slump and defeat Romney. In 2002, when the Republican ran for governor of Massachusetts, Johnson popped up again to remind voters about Marion. Better prepared, Romney weathered the attack and won the statehouse, vowing to improve the Massachusetts economy based on his business expertise.
Now, as Romney battles to become the Republican Presidential nominee, Johnson is working with the Democratic National Committee to plague the politician yet again. Once an aggrieved line worker avenging what he considered an injustice, he is, many years and several campaigns later, a seasoned operative fluent in the language and tactics of political combat. Democrats, for obvious reasons, seek him out, and he seems happy to be sought. Since late last year, the DNC has shepherded Johnson around the country in a preview of President Barack Obama’s populist-tinged fall campaign. Johnson has visited Iowa, New Hampshire, Massachusetts, Vermont, Maine, and Florida, talking to journalists and schmoozing state Democratic chairmen. In January, when Romney told an audience in Nashua, N.H., that he “enjoy[s] firing people,” Johnson cracked to reporters: “That’s not news to me. Mitt Romney fired me and everyone at the plant.” (He didn’t bother with the detail that Romney had been referring, however awkwardly, not to laying off workers but choosing among health insurers.)
In their push to undermine Romney, the Democrats have received unexpected assistance from Newt Gingrich; allies of Romney’s rival for the nomination disseminated an attack video in January that included references to Ampad and other companies acquired by Bain that later suffered financial difficulties. Romney’s campaign, unsurprisingly, offers a starkly different account of the Ampad deal and the significance of the candidate’s career at Bain. Romney maintains his business career generated employment on an impressive scale. “The jobs created at Bain Capital by companies that we helped start or that we helped manage, those companies today employ well over 100,000 more jobs than those that were lost,” Romney told Bloomberg TV on Jan. 7.
Asked for data to back up that claim, Romney spokeswoman Andrea Saul points to comments the candidate made in Greer, S.C., on Jan. 12: “There are a number of businesses that we helped start which collectively … added well over 100,000 jobs. Staples (SPLS), Bright Horizons children centers, Sports Authority, Steel Dynamics (STLD). Those four alone added well over 100,000 jobs. And then the press has also reported on businesses that lost employment and that was a few thousand jobs that were lost. In each case, where there was job loss, there was an effort on the part of the management team to try and preserve the business to have a brighter future.” To this, Saul adds: “These experiences give Mr. Romney the unique skills and capabilities to do what President Obama has failed to do: focus on job creation and turn around our nation’s faltering economy.”
Marc Wolpow, a former Romney colleague at Bain, defends the buyout business as promoting American competitiveness. The main goal at buyout firms, however, is never maximizing employment, he says. It’s maximizing returns for investors. “The facts,” Wolpow observes, “tend to get lost in the political spin.”
American Pad & Paper traces its roots to Holyoke, Mass., where in the 1880s the company introduced the yellow legal pad. In its heyday after World War II, Ampad made some 2,000 different paper products. By the 1980s, though, the small, independent office supply stores that had sold Ampad’s wares for generations were losing ground to big-box discounters, which had the muscle to squeeze manufacturers on price. Low-cost Asian importers simultaneously grabbed market share.
In 1986, Mead, a conglomerate based in Dayton that sold paper products and also owned the electronic information services Lexis and Nexis, acquired Ampad for $118 million. The year before, Ampad had profits of $4.5 million on sales of $115 million. The combination didn’t gel. Six years later, Mead admitted that it had “difficulties integrating” Ampad and would sell the subsidiary to Bain Capital in a $40 million transaction.
Bain put up only about $5 million of its investors’ money for the deal. It borrowed the rest, loading the debt on to Ampad and promising the paper company would repay the loans out of future revenue. In the 1980s and 1990s, this kind of acquisition was commonly called a leveraged buyout. If all went well, the acquiring firm would whip the target company into shape, sell it in an IPO, repay the debt out of the sale proceeds, and clear a handsome profit for its investors. If things went less well, the acquired company might end up in bankruptcy proceedings—but the LBO firm would lose only its modest equity investment. In more recent years, image-conscious LBO financiers have rebranded their businesses as private equity firms.
Semantics aside, the founders of Bain Capital originally saw the firm not as an LBO or private equity shop, but as a venture capital concern. VCs provide seed money for promising startup ventures. Silicon Valley has flourished in part because of investments by venture capital firms. Both VC and LBO firms deploy money from wealthy individuals and institutional investors such as pension funds, insurance companies, and university endowments.
Bain Capital began in 1984 as an offshoot of the corporate consulting firm Bain & Co. To lead Bain Capital, co-founder William Bain chose Romney, a 37-year-old Harvard Business School graduate whose auto executive father, George Romney, had served three terms as governor of Michigan. The initial plan was that Bain Capital would draw on Bain & Co.’s expertise to make VC investments. One early success was Bain Capital’s investment in 1986 of $650,000 in Staples, a low-price office supply store that over time would grow into a chain with more than 52,000 full-time employees.
Romney soon steered Bain Capital toward LBO investments, which he viewed as safer bets than startups. “I didn’t want to invest in startups, where the success of the enterprise depended upon something that was out of our control, such as, ‘Could Dr. X make the technology work?’ ” Romney later said, according to The Real Romney, a new biography by Michael Kranish and Scott Helman. The 1992 Ampad acquisition appealed to Romney because traditional manufacturers of office supplies were selling cheap. Implicit in the roll-up plan was that a restructured Ampad would become strong enough to withstand pricing pressure from expanding discount chains such as Bain’s other investment beneficiary, Staples. The Romney campaign declined to make the candidate available to comment for this story.
In June 1994, Ampad paid an undisclosed sum for SCM, the office supply business of Smith Corona, a fading typewriter manufacturer. Smith Corona owned the hanging-file and index-card factory in Marion. And so it was that Mitt Romney and Randy Johnson crossed paths.
“We never heard of Bain,” Johnson says. “All we knew was that some company called Ampad took over the factory. … We were getting paid a lot less for working longer hours, and now we were paying big premiums we never paid before for health insurance.” The son of an Indiana gas station owner, Johnson graduated from high school in 1972. His career included painting locomotives and working in a concrete-block factory. In 1986 he landed at the brick-front Smith Corona plant in Marion, his first unionized shop. Other members of Local 154 of the United Paperworkers International liked the way he handled himself, and Johnson rose to become the union’s top on-site official, putting him smack in the middle of the Ampad takeover.
“The workers were all fired up” by the ensuing pay and benefit cuts, Johnson says. All-night negotiations with management representatives did not produce compromise. On Sept. 1, 1994, he led a strike, the first of his life, and one in which the union didn’t enjoy a strong bargaining position. Employees from the much larger General Motors (GM) stamping plant across the road took up a collection for the paper workers. A local McDonald’s (MCD) sent over free hamburgers. Then something unusual happened. “Three weeks in,” Johnson says, “my thermal fax machine starts up, and here comes a Boston Globe article telling us that Bain Capital is the one behind Ampad, and Mitt Romney, who’s running for senator from Massachusetts, is the man behind Bain Capital.”
After enjoying extraordinary financial success at Bain, Romney decided to emulate his father’s move into politics and public service. In late 1993 he took a leave of absence from Bain and, running as a moderate Republican, announced he would challenge Kennedy for his long-held Massachusetts Senate seat. Romney portrayed Kennedy, 62 at the time, as a weary liberal. Democrats nationally were on the defensive in the 1994 midterm elections, which would eventually result in a shift of the U.S. House of Representatives to Republican control.
As summer turned to fall, Romney was running ahead of Kennedy in opinion polls, and an upset seemed possible. It was the Kennedy campaign that brought the situation in Marion to the attention of the Globe. And just one week after Johnson’s fax transmitted the Boston newspaper’s report on the Romney-Bain-Ampad connection, Kennedy himself showed up in Marion to meet with union officials. A few days later, a Kennedy film crew arrived to record interviews with striking workers. Ads appeared on television in Massachusetts, featuring the striking Marion paper workers. “I’d like him to show me where these 10,000 jobs that he created are,” one said of Romney. “I’d like to say to the people of Massachusetts,” another striker added, “if you think it can’t happen to you, think again.”
The onslaught stunned Romney. In a 2002 interview with Bloomberg News, C. Kevin Landry, then chief executive of rival private equity firm TA Associates, recalled Romney telling him: “I was a deer in the headlights.” The rookie candidate could have avoided the ambush, his former Bain colleague Wolpow says. A political independent who backed Romney in 1994 “out of friendship,” he remembers warning the Republican not to portray LBO investing as aimed primarily at boosting employment. “I believed he was making a mistake by framing himself as a job creator,” says Wolpow, who is co-CEO of Audax Group, an investment firm in Boston. “That was not his or Bain’s or the [buyout] industry’s primary objective. The objective of the LBO business is maximizing returns for investors, and those investors include union pension funds.”
Wolpow proved prescient. The Massachusetts media gave copious attention to Kennedy’s attack on Bain and Romney. The Democrat came roaring back and in November beat the upstart 58-41. Wolpow, who voted for Obama in 2008 and has not made up his mind which candidate he’ll support this November, argues that Romney was not to blame for what happened in Marion. “Mitt’s role was entirely appropriate,” he says. “This was a declining industry. Jobs were being lost in the U.S. Indonesians were producing paper products at a much lower cost.” By buying and combining financially troubled companies, Bain thinned a dying herd and gave the survivors a chance to stay in business. “From the narrow perspective of the union workers involved, the deal was a disaster,” Wolpow acknowledges. “They lost their jobs.” He says the workers were the unfortunate victims of “creative destruction,” a term popularized by the late economist Joseph Schumpeter to describe the sometimes brutal manner in which capitalism sloughs off less competitive businesses.
The leverage in LBOs can accelerate the Darwinian sorting process, heightening pressure to eliminate slower-performing operations. Bain Capital boosted Ampad’s debt from less than $20 million in 1994 to $450 million in 1995. During the period it controlled Ampad, Bain charged the company roughly $15 million in fees.
In December 1995, Ampad said it would shut down the Marion plant unless the union made even more concessions. Johnson called for a vote. At an emotional meeting, some employees said they’d live with lower pay and benefits; they pleaded to be allowed to go back to work, especially with Christmas coming. As he recalls the debate, Johnson’s voice catches. “You got people thinking about feeding their kids,” he says softly. He sensed the plant was doomed because the new management had already begun removing valuable automated machinery and shipping it to other Ampad facilities. But as a matter of principle, he pushed for a walkout, and the final vote was 156-14 to reject management’s demands. Ampad closed the plant on Jan. 15, and 240 people lost their jobs.
During the final days of the standoff, Johnson sent Romney a letter, asking him to intervene and save the Marion factory. By then, Romney had lost to Kennedy and was back at Bain. On the day the plant closed, Johnson says, he received a faxed response from Boston. He pulls the aging paper from the Romney box. “There is probably no one in Massachusetts who wishes more than I that union leaders like you and company officials had settled their differences,” Romney wrote. He said he was sorry about the situation but that his lawyers had advised him not to get involved. Asked about this exchange, Romney spokeswoman Saul offered no comment.
“It was a lot of song and dance,” Johnson says. “I mean, here’s the boss, and he’s acting like he’s got nothing to do with the situation.” Though Bain Capital signed off on the plant closure, Ampad was run by a separate group of paper industry executives based in Dallas. Ampad’s chairman and CEO, Charles Hanson III, told the New York Times in October 1994 that since Romney and his partners had bought the company, profits at its three other factories had grown, as had employment, from 728 jobs to 850. “People of entrepreneurial bent took [Ampad] over and made it successful,” he said.
Johnson was out of work for five-and-a-half months before he found a job fixing engines at a used-car lot. His leadership in Marion and willingness to confront Romney did not go unnoticed; the United Paperworkers offered him a job as a full-time staff organizer, and that post led to his current assignment with the United Steelworkers in Pittsburgh.
The Ampad roll up, meanwhile, continued. In October 1995, Bain acquired Williamhouse-Regency of Delaware for $300 million. Nine months later, in July 1996, Bain began cashing out of the investment by arranging for an IPO of Ampad that raised $234 million from investors. Ampad announced it would use money from the IPO to repay $107 million in bank debt. An additional $70 million of IPO proceeds were used to redeem notes and pay related fees. Bain took a $2 million fee for arranging the IPO, on top of the roughly $50 million it collected by selling some of its Ampad shares.
Bain and its investors realized $107 million on the firm’s $5 million equity investment, according to a private prospectus prepared by Deutsche Bank (DB) in 2000 for clients looking into Bain Capital. The annual rate of return on the Ampad deal totaled 130 percent—impressive even in the rarefied world of LBOs. The Deutsche Bank analysis covered the years 1984 through 1999, most of the period when Romney led Bain. “Bain Capital’s first five private equity funds achieved an annualized rate of return of approximately 173 percent per annum on all realized investments,” Deutsche Bank said. “These returns are among the highest returns in the private equity community over the 16-year period during which Bain Capital has been investing.”
Ampad wasn’t so fortunate. After the IPO, it continued to expand and borrow heavily, even as its profits were pressured by Staples and other powerful customers. In its first consolidated financial report following the IPO, Ampad reported that for the second quarter of 1996 its sales had nearly tripled, to $114 million. But it posted a loss for the quarter, reversing its 1995 second-quarter net income of $1.9 million. By 2000, Ampad could no longer make timely interest payments on its debts, so bondholders forced the company into Chapter 11 court proceedings. After it shed some of the units that Bain had bolted together, Ampad was acquired out of bankruptcy by American Tissue of Hauppauge, N.Y. In 2001, American Tissue filed for Chapter 11 protection from its creditors.
The Ampad story illustrates why Mitt Romney has struggled to portray his private equity success as an inspirational tale instead of a cautionary one. Leveraged restructuring is an unsentimental, often harsh business. Sometimes it results in a second chance for a failing company. Other times it leads to collapse, because of bad luck, recklessness, or miscalculation. Either way, there are clear winners and losers—and the biggest winners tend to be investors who often make money whether the bought-out company thrives or fails. This would be a difficult thing to explain for even the nimblest of politicians, which Romney is not. Instead of mounting a vigorous capitalist defense of creative destruction, he has glossed over messy details to insist improbably that most of all, his years in business taught him how to create jobs.
By 2002, Romney had left Bain with a fortune he now estimates at as much as $250 million. He was still determined to serve in public office. His goal was the Massachusetts governorship, and that spring he told Bloomberg News he wouldn’t repeat the mistake of failing to answer those who said he destroyed jobs. “I’m proud to take responsibility for my own record as a manager,” he said. “I can’t possibly take the blame for all 200 companies in Bain Capital’s portfolio, any more than I am going to take credit or blame for all the investments in my 401(k).”
His Democratic opponent, State Treasurer Shannon O’Brien, ran ads reprising the complaints of former Ampad workers. At a press conference in Boston in October 2002, Senator Kennedy appeared along with Johnson and several other veterans of the Marion plant closure. “We don’t want to see what happened to these workers happen in Massachusetts,” Kennedy said, according to the Globe. Johnson remembers receiving a skeptical greeting from journalists. “The reporters were demanding, ‘Who paid for you to be here?’ ” He told them the Democrats had covered his travel expenses, but nothing more. “Did that taint my story? I don’t think so. I just said what had happened.”
Johnson has a thick skin for criticism. He enjoys the political skirmishes and media attention. And why not? Here’s a guy who might have scraped by as just another Rust Belt refugee, but instead transformed himself into a union hero and minor celebrity, courtesy of a brush with Bain Capital and a fax from Mitt Romney.
In 2002, Romney gave as good as he got, accusing his opponent, O’Brien, of “exploiting” the former Marion workers and “filling their heads with things that are not true,” the Globe reported. He emphasized that he’d been on leave from Bain when critical decisions were made about the Marion labor controversy. “I had no involvement whatsoever,” he said.
Hanson, who as Ampad’s Dallas-based CEO had defended Romney back in 1994, changed his tone eight years later. In 1998, Bain asked for Hanson’s resignation. In 2002 he told the Globe that he had “no doubt Romney approved of” the roll-up strategy that would result in consolidation and layoffs. “Any significant direction we received would certainly have been authorized by him,” Hanson said.
After completing his four-year term as Massachusetts governor in 2007, Romney set his sights on the Republican Presidential nomination. Emphasizing his Bain experience, he conceded that occasionally LBOs can cause discomfort. “Sometimes the medicine is a little bitter, but it is necessary to save the life of the patient,” he told the New York Times in June 2007. Speaking at a retirement community in South Carolina in January 2008, he said, “We fought every time to grow employment.”
Johnson, watching from his perch at the Steelworkers, readied his Romney box. But Romney’s rival for the nomination, John McCain, soon pulled ahead decisively, and Johnson sat out the race. He favored Hillary Clinton in the Democratic primaries, getting behind Obama only after he became the party’s nominee.
Johnson says he hadn’t focused closely on the battle for the 2012 Republican Presidential nomination until ABC News called late last year to ask if he’d do an interview about the Marion episode. Leo Gerard, the president of the Steelworkers, gave his permission. That led to an invitation from The Ed Show on liberal-leaning MSNBC. Then the DNC asked if he’d like to go to Iowa and New Hampshire, where the Democrats were road-testing anti-Romney messages. At a press conference in Des Moines, he said, “I really feel he didn’t care about the worker.” By e-mail, Saul, the Romney spokeswoman, says: “Mitt Romney spent 25 years as a businessman and entrepreneur. At Bain & Co., a management consulting firm, he helped lead a successful turnaround. At Bain Capital, he helped launch and guide a private equity and financial services firm. Bain Capital invested in many businesses; while not every business was successful, the firm had an excellent overall track record and created jobs with well-known companies.”
Wayne Seybold, the former Olympic figure skater and hometown hero who serves as the mayor of Marion, wishes his city of 30,000 were famous for something other than a nearly two-decade-old plant closure. A Republican now in his third term, Seybold works hard to bring business to Marion. In an interview at City Hall, he notes that if you drive past the old Ampad factory today, you’ll see the building has a new occupant: Nova Packaging, which manufactures corrugated boxes. A dogged optimist, Seybold says the town has bounced back since unemployment hit 17 percent in 2004: “We range from the high 9s to about 11 percent.”
After additional corporate convolutions, Ampad, still based in the Dallas area, was acquired in 2010 by Esselte, a $1 billion office products company with subsidiaries in 31 countries. Owned by the private equity firm J.W. Childs Associates, Esselte does not talk to the media and wouldn’t say how many people Ampad employs today. On an affiliate’s website, Ampad advertises its envelopes and pads under such brands as Gold Fibre and Envirotec.
As much as Seybold may want to leave Marion’s past behind, Johnson and his political handlers are determined to make sure that doesn’t happen. When Johnson traveled to New Hampshire to make his case against Romney, he was accompanied by Brad Woodhouse, communications director for the DNC. The Democratic spokesman declined to comment on how his side might deploy the union organizer in a potential race against Romney in the fall. Woodhouse didn’t deny, however, that Ampad probably would surface if Romney gets the GOP nomination. “I’m ready if they need me,” Johnson says.
His guerrilla activism has already made him a target of certain conservatives. In a column on the Human Events website, pundit Ann Coulter referred to him as “bitter and lying.” For a while, “Bain led Ampad to thrive,” she wrote. “Alas, people kept using those damn computers and shopping for discount paper at Staples and similar stores.”
Johnson seems amused by the vituperation. He says he agrees with one thing Coulter said in her column: “Bain’s acquisition of Ampad is the Left’s best shot against Romney’s business career.” Coulter doesn’t think that shot adds up to much. Johnson says he’s got ammunition in reserve, in the Romney box.