Boston Buyout Firm Cashes In by Adding Value

Three years ago, W. Mitt Romney unsuccessfully challenged Edward M. Kennedy for his seat in the U.S. Senate.

"That was the only bad deal we did in 1994," Mr. Romney recently recalled. "I'm sticking to good deals now."

Mr. Romney is not kidding.

Bain Capital Inc., the Boston-based leveraged buyout firm Mr. Romney founded in 1984, is considered one of the most successful shops of its kind-and one of the most coveted clients anywhere for banks and others in corporate finance.

The firm has completed some 110 acquisitions, with revenues over $14 billion, and logged an average rate of return of over 100%. Bain typically buys companies with some of its own equity and uses the bank loan and junk bond markets to finance the rest.

Just last week it called on Goldman Sachs & Co., J.P. Morgan & Co., and BT Alex. Brown Inc. to help it close an $800 million deal for Sealy Co., the Cleveland-based mattress company. With its constant need for financing and advisory services, Bain is an ideal consumer of "one-stop shopping"-a concept that has hastenedweddings between commercial and investment banks in 1997.

"One-stop shopping means speed and reliability if the stop is one you can count on," Mr. Romney said. "If we're considering an acquisition of a U.S. target with foreign operations, or if we're bidding against two or three other groups, not to have to run around to multiple providers of capital" is a big help.

Recently, firms like Mr. Romney's have been busier than ever. A whopping $34.28 billion in new private equity funds were launched in 1997, according to Buyouts, a newsletter published by Securities Data Publishing. That is up from $15.29 billion in 1996.

Many of those funds will now try to emulate Mr. Romney's success.

"Bain hit early on the model in private equity that everybody is following," said Steven Kaplan, a professor of entrepreneurial finance at University of Chicago business school.

"What Bain did, and more and more funds are doing, is add some operational or strategic value" to the companies it invests in.

That is due in part to the unique cultural roots of the firm. Many of its 16 managing directors and 60 investment professionals have operational training, and some have spent their careers at Bain & Co., the Boston-based international consulting firm that sprang from the same parent as the buyout firm.

As a result, Bain "combines a rigorous analytical approach and strong strategic insight" to its deals, said Sean Mahoney, a managing director in Goldman Sachs' financial buyers group. After Bain buys a company, it very quickly shifts its focus to how it can improve it.

Bain typically buys companies with annual revenues between $50 million and $1 billion. It finances between 60% and 80% of each deal in the bank loan and junk bond markets.

It holds on to the companies in which it invests for about five years, working with management to bring operations up to snuff. This year alone the firm has completed 17 investments and 30 add-on acquisitions.

Mr. Romney, 50, started the private equity group after nine years in consulting at Bain and two years at Boston Consulting Group. After months of studying the private equity industry, he and five other professionals raised their first fund-$37 million-in December of 1984.

At the request of founder William Bain, Mr. Romney returned to the Bain consulting firm in 1991 to serve as interim chief executive officer. The firm had suffered financial trauma after completing a buyout plan that had gone awry.

Mr. Romney spent two years restructuring the consultancy, which is now considered highly successful. Mr. Romney is no longer involved in its management.

For Mr. Romney, leadership is a natural role. He is the son of George Romney, a three-term governor of Michigan who served as secretary of Housing and Urban Development under President Nixon.

In January, Bain & Co. will close its sixth investment fund, for which it plans to amass $2 billion worth of equity and high-yield debt. This month, it is finishing investing its fifth fund, a $500 million war chest it amassed two years ago.

Bain landed in the spotlight last year when it completed the $1.1 billion buyout of Experian Information Solutions. Bain teamed up with Thomas H. Lee Co., another Boston-based buyout firm, to buy the information systems and services unit of TRW Inc., a Cleveland-based auto, space, and defense company.

To finance the purchase, Bain and Lee shared a $275 million equity investment. Chase Manhattan Corp. and Bankers Trust made a $550 million bank loan and managed a $250 million junk bond offering for the deal

By November, Bain and Lee had sold Experian to British retailer Great Universal Stores PLC for $1.7 billion. With the sale, Bain tripled its investment and made history as a player in one of the fastest and most lucrative buyouts ever.

"Bain's record of success, whether measured through financial returns or successful transformation of companies, is quite impressive," said Joshua Lerner, an associate professor of venture capital and private equity at Harvard Business School.

"They've done this with a very clear emphasis on the operational strategy."

The deal that jump-started Bain's business came along in 1986, a $200 million buyout of Accuride Corp., the wheel and rim manufacturing unit of Firestone Co., Phoenix. Bain financed the deal with just $5 million of its own equity and borrowed the rest.

Just 18 months later, Bain sold Accuride to Phelps Dodge Co. for $320 million. Its return on its investment: $130 million.

"That was in the glorious days of Drexel Burnham," Mr. Romney recalled. "It was fun while it lasted, but fortunately, it came to an end."

These days, firms typically fund their buyouts with as much as 25% of their own equity. Still, Mr. Romney has a bird's-eye view of the most recent evolutions in financial services, the convergence between investment and commercial banking.

Just last month, Bain wrapped up a one-stop shopping trip for its $330 million buyout of Details Inc., an Anaheim, Calif.-based maker of printed circuit boards. Chase Manhattan helped finance the deal with a $100 million bank loan and a $175 million junk bond deal. A Bain-led investment group put in $90 million of equity.

Joshua Bekenstein, a managing director at Bain, said that when choosing a lender, the firm tries to make sure it is "focusing on someone who can do a great job on that financing, and in whom we are also confident that no matter what happens, they can help us can get the deal done."

While intense competition has forced banks to provide flawless service at competitive rates, the "icing on the cake" is to be able to provide investment opportunities, Mr. Romney said.

"We want to work increasingly closely with the institutions that bring us ideas," he said.

Mr. Bekenstein added, "If they bring us the deal, we're more than happy to use them for the financing."

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