By MICHAEL BARBARO
By the green-hued yardsticks of Wall Street, the 1990s buyout of an Illinois medical company by Mitt Romney’s private equity firm was a spectacular success.
Mr. Romney’s company, Bain Capital, sent in a team of 10 turnaround experts from Boston to ferret out waste, motivate executives and study untapped markets.
By the time the Harvard M.B.A.’s from Bain were finished, sales at the medical company, Dade International, had more than doubled. The business acquired two of its rivals. And Mr. Romney’s firm collected $242 million, a return eight times its investment.
But an examination of the Dade deal, which Mr. Romney approved and presided over, shows the unintended human costs and messy financial consequences behind the brand of capitalism that he practiced for 15 years.
At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. And in waves of layoffs, it cut loose 1,700 workers in the United States, including Brian and Christine Shoemaker, who lost their jobs at a plant in Westwood, Mass. Staggered, Mr. Shoemaker wondered, “How can the bean counters just come in here and say, Hey, it’s over?”
Mr. Romney’s career at Bain Capital, which he owned and ran as chief executive, is a cornerstone of his campaign for the Republican presidential nomination — a credential, he argues, that showcases the management skills and business acumen that America needs to revive a stalled economy. Creating jobs, Mr. Romney says, is exactly what he knows how to do.
The White House, though, is already preparing a less flattering portrayal, trying to frame Mr. Romney’s record at Bain as evidence that he would pursue slash and burn economics and that his business career thrived by enriching the elite at the expense of the working class.
From 1984 to 1999, Mr. Romney and his deputies made fortunes by investing in, acquiring and then selling about 150 companies. It was high-stakes work that shaped Mr. Romney’s values and views, taught him the art of salesmanship and negotiation and took him deep inside the boardrooms and factories of American business.
Because financial data for many of the acquisitions are not publicly available, it is difficult to fully tally the wins and losses, the jobs created and the jobs eliminated on Mr. Romney’s watch. But the experience with Dade, Bain’s biggest transaction at the time, shows how Bain managed its investments, structuring deals so it would be hard for Mr. Romney and his partners not to come out ahead.
Bain and a small group of investors bought Dade in 1994 with mostly borrowed money, limiting their risk. They extracted cash from the company at almost every turn — paying themselves nearly $100 million in fees, first for buying the company and then for helping to run it. Later, just after Mr. Romney stepped down from his role, Bain took $242 million out of the business in a transaction that, according to bankruptcy documents and several former Dade officials, weakened the company.
Even some people who benefited from that payday and found it reasonable at the time now question it. “You would have to say, looking back, that it was too large, because it pushed us into bankruptcy,” said Robert W. Brightfelt, a former Dade president who collected more than $1 million.
Bain Capital declined to comment specifically on the Dade acquisition, but cited a long history of improving companies’ performance in both “good and challenging economic conditions.” A campaign spokeswoman, Andrea Saul, defended Mr. Romney’s tenure at Bain, saying that “while not every business was successful, the firm had an excellent overall track record and created jobs with well-known companies.”
In recent years, Mr. Romney has acknowledged having second thoughts about some of the deals he drove, saying his post-Bain career in government had sensitized him to the consequences of his decisions as a businessman.
But Romney the candidate can still frequently sound like Romney the C.E.O. On the campaign trail, he has taken a tough-love approach to the economy, suggesting that the best remedy for the housing market is to allow foreclosures to “hit the bottom”; railing against wasteful spending by the government-backed solar company Solyndra; and arguing that companies with poor strategies, like General Motors, should be allowed to go bankrupt, without a federal bailout.
It was the same approach he took with Bain, as he explained in an interview with The New York Times in 2007, when asked about layoffs at the companies he bought.
“Sometimes the medicine is a little bitter,” he said, “but it is necessary to save the life of the patient.”
In the early 1990s, as the American economy rebounded from a recession, the biggest names in the buyout business hungrily eyed Dade, then a little-known maker of medical technology based in Deerfield, Ill.
It was ripe for a takeover. Its main product, copy-machine-size units that ran blood tests in hospitals, laboratories and doctors’ offices, was widely used but rife with problems. Dade’s owner, the giant health care company Baxter International, was ready to dump its aging diagnostic division.
Bain impressed Baxter’s management with its vision for how to fix the ailing business. Mr. Romney, who began Bain Capital in 1983, prided himself on turning around companies like Dade — not just polishing them for sale, as their quick-buck Wall Street colleagues did.
It was the Bain Way, reflecting the firm’s roots as a spinoff of the venerable consulting firm where Mr. Romney had been a star performer, Bain & Company. At age 36, Mr. Romney was asked by the founder, William W. Bain Jr., to jump into the relatively new, risky and extraordinarily profitable business of private equity.
The idea was tantalizing: raise money from a pool of investors, like wealthy families and public pensions; buy a struggling company using a small amount of cash and a lot of financed debt; improve its operations; and then sell it for a profit.
By marrying traditional financial engineering with management consulting, Bain Capital produced much higher returns than its rivals.
“They were unusual in doing that in the ’80s,” said Steven N. Kaplan, a professor of finance at the University of Chicago, who has studied the private equity business. “Romney figured it out, and everyone else copied it.”
Bain Capital was a partnership, but there was no question who was in charge: as the owner of all the voting stock, Mr. Romney controlled the profits and the power.
He did not act like a big shot — he bypassed his secretary to make photocopies himself and left the building to buy himself lunch. But his values prevailed: he insisted on cheap, spartan office decorations (the original desks contained no wood) and introduced fines for executives who arrived late to meetings (when he once had to pay a $20 penalty, he looked physically pained, a co-worker recalled).
Colleagues remember him as a heavily perspiring, deeply anxious presence for much of the first year, constantly worried that he might tarnish the good name of Bain & Company by fumbling at Bain Capital.
“There was enormous pressure on Mitt not to have any bad investments,” recalled Geoffrey S. Rehnert, an early managing director at Bain Capital. The message from Bain & Company was “don’t do anything that embarrasses us.”
Mr. Romney did not. In just a few years, Bain Capital made eye-popping sums of money in deal after deal — “the golden goose” that was laying “golden eggs,” as he would later call it.
Mr. Romney nurtured startups like the fledgling office supply chain Staples, at times over the objections of skeptical Bain partners. Its 1986 investment of about $2 million netted Bain Capital $13 million.
Some of the first buyouts were even more lucrative. Bain Capital earned $34 million, 34 times its 1986 investment, in Calumet Coach, a manufacturer of medical equipment, for example. It made $55 million, 16 times its 1990 investment, in the Gartner Group, a technology research firm, according to documents sent to potential investors.
Young executives became wealthy overnight. “It was a heady experience,” Mr. Rehnert remembered. “It was life altering, because we could pay down mortgages or buy bigger houses or new cars at a stage in life when those were big luxuries, ahead of our peers.”
As Bain Capital expanded, Mr. Romney cut back his travel to the headquarters of companies, assigning to lower-level executives the task of scouring balance sheets and interviewing managers. But he reviewed the numbers and signed off on major acquisitions, like the Dade purchase.
“He certainly approved the deal, understood it, had presentations made to him regarding it,” recalled Scott Garrett, Dade’s chief executive at the time. “He became quite knowledgeable about the business.”
In the waning days of 1994, a small group of investors led by Bain Capital, including Goldman Sachs, paid $450 million for Dade. Bain invested about $30 million.
Dade employees could always tell when Bain Capital executives were in town: their bosses worked longer hours.
“The thing Bain brought was urgency,” Mr. Brightfelt said. “It was 24 hours a day. It never stopped.”
At Dade’s headquarters, the men from Bain — young, nattily dressed Bostonians — exerted themselves in ways big and small as the new owners. They took a majority of seats on the board of directors. They interviewed candidates for high-level jobs. They negotiated crucial contracts with suppliers. And they requested reams of data.
In 1995, Bain officials debated whether Dade should buy a competitor, a diagnostics division of DuPont Medical Products that owned technology vital to Dade’s future. Some Bain executives advocated quickly selling off Dade for a tidy profit. Others counseled patience, arguing that Bain could collect even more by investing in the company for a few years.
Mr. Romney, in Bain’s boardroom in Boston, listened intently to both sides and rendered a verdict: Dade should acquire the DuPont unit. Mr. Romney “wanted to double down on Dade,” Mr. Garrett recalled.
In back-to-back acquisitions, Dade bought the DuPont diagnostics division in 1996 and a German medical testing company, Behring, in 1997, whose products replaced or improved upon Dade’s.
Renamed Dade Behring, it became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers.
The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast — Dade’s long-term liabilities, which surged to $816 million from $298 million.
Layoffs and Cutbacks
Cost-cutting became a mantra inside the company. After his employer, DuPont, was bought by Dade, William T. Mowrey, a field engineer, said his generous pension plan was replaced by a 401(k); his salary was cut by $1 an hour, costing him $2,000 a year in income. When he filed for overtime, he said, his new bosses refused to pay it. “They were just trying to milk as much out of us as they could,” he said.
Mr. Mowrey, now 54, quit. Many workers, like Mr. Shoemaker, the Dade employee in Westwood, and his wife, a temporary employee at the same plant, did not leave on their own terms. When they lost their jobs in 1997, they had to abandon plans to buy their first home together. “It created a lot of stress,” said Mr. Shoemaker, 59, who had earned more than $80,000 a year.
For some, the emotional effects of the layoffs outweighed the financial repercussions. Soon after Dade bought the DuPont unit, it closed a plant in Puerto Rico; all but a few of its nearly 300 workers were laid off.
Arsenio Muñiz Rosado, a 51-year-old father who had spent 23 years at the plant, starting out as a groundskeeper, sank into a debilitating depression. Still jobless six months after he was let go, he tried to commit suicide with a bottle full of Xanax pills. It was the first of several attempts.
For all intents and purposes, he said of the plant, “I died in there.”
Cindy Hewitt, a human resources manager, had been instructed to persuade about a dozen of Mr. Rosado’s co-workers to move to Miami, where Dade had another plant.
Not long after the workers arrived, the company said it would close that factory, too. Ms. Hewitt tried to help several workers return to Puerto Rico, but she said Dade insisted that they first repay thousands of dollars of moving costs. “They were treated horribly,” she said. “There was absolutely no concern for the employees. It was truly and completely profit-focused.”
Ms. Hewitt said she was so disillusioned by the experience that she left the corporate world.
Executives involved in the decisions said that to make Dade a success, they had combined companies in need of overhaul. And the mergers created redundant work forces that had to be winnowed.
“It’s not done because they love cutting jobs,” said Mark Wolsey-Paige, a former senior vice president at Dade. “It ultimately made those companies stronger.”
He added: “Something even worse would have happened if they had remained as they were before Bain bought them. It would have been a steady stream of cuts and layoffs.”
Tipping Into Bankruptcy
By 1998, Mr. Romney and his restless colleagues at Bain began looking for a way to cash out of the firm’s investment in Dade.
A hefty offer arrived. Kohlberg Kravis Roberts & Company, a rival buyout firm, proposed buying Dade Behring for $1.9 billion, according to documents filed in the bankruptcy case. But Bain executives rejected it, disappointed by the price, the documents indicate.
Bain settled on a common tactic in private equity: In April 1999, it pushed Dade to borrow hundreds of millions of dollars to buy half of Bain’s shares in the company — and half of those of its investment partners.
Bain pocketed the $242 million. Goldman received $121 million. Top Dade executives got $55 million, records show. The total payout to shareholders reached $420 million — nearly as much as the purchase price for Dade.
The money was hard to resist, acknowledged Mr. Brightfelt, the former Dade president. “We were all glad to get some cash out,” he said, “and we thought we deserved it.”
A few months before the payout, in February 1999, Mr. Romney retired from Bain Capital to oversee the Olympic Games in Salt Lake City. He nevertheless benefited from the transaction, a financial disclosure form indicates. It shows that until at least 2001, he owned 16.5 percent of the Bain Capital partnership responsible for the Dade investment.
Even as the investors prospered, Dade cut 367 more jobs in 1999, documents filed with the Securities and Exchange Commission show.
The strategy of sharply increasing Dade’s debt alarmed several executives. Mr. Garrett, the former chief executive of Dade who stood to gain from the transaction, said he had argued unsuccessfully against it.
“It was too aggressive,” Mr. Garrett said. “It was done right up to the limit of what the company could borrow.”
With the amount of money that Dade owed to creditors and vendors at nearly $2 billion, some executives worried that the company would have little maneuvering room if its financial situation suddenly deteriorated.
Soon enough, it did. Interest rates rose, increasing Dade’s debt payments. The value of the euro, then a new currency, slid, reducing Dade’s European revenue. And a new distribution center had unexpected delays.
Creditors, unsettled by deteriorating finances and high debts, began to pounce. More layoffs followed. And in August of 2002, Dade filed for bankruptcy protection.
The creditors threatened litigation against Bain and its investment partners, accusing them of “professional negligence” and “unjust enrichment,” according to bankruptcy documents. Bain and the other investors argued that the claims were baseless, but agreed to forgo about $68 million owed to them by Dade. And seven years after buying the company, Bain forfeited its remaining ownership stake.
Dade emerged from bankruptcy two months later and the stock soon began trading publicly.
Over the next four years, its revenues and share price surged, and in 2007, Siemens, the German conglomerate, paid $7 billion to buy Dade Behring. The Dade name disappeared, but the company survived.
Bain’s strategy, as painful as it was with plant closings and layoffs, had ultimately worked, executives said. The bankruptcy “does muddy the story,” said Mr. Wolsey-Paige, the former Dade executive. “Over all,” he said, “it was very positive.”