January 25, 2012
Eastman Kodak’s recent bankruptcy is a timely reminder of how sleepy managements can throw thousands out of work – and of the role private equity firms like Bain Capital have played in rescuing American companies. Kodak, the paternalistic giant, was blindsided by Fuji Photo decades ago and then by the rise of digital photography. The organizational structure was a mess. At one time, while giant Canon was working with three different printer engines, Kodak was developing 66, so “silo-ed” was its operations. It is quite possible that outside investors like Bain Capital, with eyes uncluttered by past allegiances, could have saved Eastman Kodak – and at least some of the jobs that have been lost.
Mitt Romney’s campaign has failed to make that point. What was his campaign staff thinking? How could they be caught flat-footed by Newt Gingrich’s attacks on the candidate’s business career, his prime credential in the race to unseat President Obama? Supporters have been shocked that Romney has not countered criticisms of his experience at Bain Capital -- an appalling lapse that cost him South Carolina and has him now trailing in Florida. While others have spoken up for private equity investing, the campaign remains mute. Romney needs to tell the story that will resound with voters -- the story of America’s reboot.
During the ‘70s, I was a young Wall Street analyst sent out to talk to business execs at auto companies, dragline producers, makers of machine tools and farm equipment. Yes, it was very sexy.
Everywhere, I found the same story: Upstart foreign competitors (mostly from Japan) were gobbling up market share. More alarming, the newly visible rivals were selling a better product. Quality control programs embraced by Japanese steel, auto and machinery producers meant a vast reduction in reject rates; they were not succeeding because of price alone. They delivered better value.
Some of our better managed companies (Caterpillar, Deere) rallied to this increased competition; others – including auto companies situated far from the California docks where Toyotas rolled off ships in the thousands -- didn’t have a clue. When OPEC sharply jacked up oil prices, the trickle of economical Toyotas and Hondas into the U.S. became a torrent. In 1965 the U.S. imported 25,538 cars from Japan. By 1975, that figure had soared to 695,573; a decade later, we imported 2.5 million automobiles from Japan – a 100-fold jump in 20 years. By contrast, sales of U.S.-made cars and trucks actually dropped between 1965 and 1985 – from 8.8 million to 8.2 million.
The truth began to dawn: U.S. companies had gone soft. They were increasingly uncompetitive and stuffed with excess costs.
Similarly, Japanese steel producers clobbered U.S. manufacturers in the 1970s, producing cheaper and higher-quality products in modernized plants built after World War II. By the late 1970s our domestic industry was in trouble; five companies received $300 million in loan guarantees from the Carter administration. Later presidents tried to help the industry’s long decline by imposing import quotas (Reagan) and offering loan guarantees (Clinton) to no avail.
Americans were appalled. The truth began to dawn: U.S. companies had gone soft. They were increasingly uncompetitive and stuffed with excess costs. The door to change was opened and, with the assist of a depressed stock market, in walked the so-called corporate raiders. Their objective was to buy fat but enduring firms with largely borrowed funds, trim the excess and ultimately sell back to the public a leaner more profitable company. Sometimes this was done with the cooperation of management, sometimes not.
Between 1979 and 1989, there were over 2,000 leveraged buyouts worth more than $250 billion. Kohlberg, Kravis, Icahn, Peltz, Pickens, Bass and many others played the game. Wilbur Ross stepped into the all-but defunct steel industry and bought LTV Steel, Bethlehem and certain other companies which he combined to make the International Steel Group. By renegotiating pensions, cutting the workforce and changing union work rules, Ross kept the companies alive.
There are fewer over-ripe targets for plucking, and consequently fewer hostile deals that make headlines.
In 1989, the $31 billion hostile buy-out of giant RJR Nabisco highlighted the sea-change in U.S. industry. If such a large company was at risk, no one was safe. In boardrooms across the country, CEOs, alarmed about foreign competition and goaded by raiders, worked harder to jack up profits. Some cut costs by shipping jobs overseas, automating or trimming worker benefits. Others plied foreign markets or changed decades-old distribution and marketing models. They got tougher.
Today, private equity investing is less visible and more sophisticated. There are fewer over-ripe targets for plucking, and consequently fewer hostile deals that make headlines. Private equity investors now typically look for companies that can profit from outside expertise - like how to ramp up exports, or navigate government regulations.
Companies like Bain or Blackstone can help finance new technology or can acquire services like insurance more cheaply because of their “stable” of companies. By taking companies private, managements can plan for the long term, avoiding the immediate judgments of the stock market. They can forego current growth to move a plant, for instance, or risk a disruptive shift in management. As Bain and others did with Staples, private equity investors can take a young firm to the next level.
Private equity investing has made billions in profits for investors, including thousands of colleges and pension funds. It would be impossible to measure the jobs gained or lost through the many deals that have taken place, but this is for certain: American industry is better off today than if profit-hungry private equity investors had never roamed the country. The wholesale tightening of management practices (Ross flattened Bethlehem Steel’s management from eight layers to three) and revamping of labor costs saved many firms from going under.
Romney seems incapable of telling this story – his story. He needs to tell voters that he figured in America’s first reboot, and stands ready to do it again. This country needs, one more time, to overhaul our business model and to regain our competitive edge. Mitt Romney is the man to get it done.