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On a winter's evening in 1985, Mitt Romney sat in a drab 10-by-10-foot conference room in Boston's Copley Place, flapping his tie to mimic a rapidly beating heart. His colleagues knew that when Romney flapped his tie, it meant he was under pressure. Lately, the young businessman had been feeling it like never before.
The pressure had been building ever since he'd been tapped by his mentor to create and run an investment firm called Bain Capital. But two years after Romney took the job, and more than a year after he officially launched the firm, Bain Capital had yet to make many investments. And the few it had made were foundering.
Sitting in the conference room, Romney was so worried about the start-up's future that, according to one colleague, he raised the possibility of just returning the millions they had raised from investors and going back to their old jobs.
Dressed in a crisp blue shirt, with a white collar and gold collar-pin, Romney appeared to be the model of a successful young financier, with one exception. His shirt, according to colleague Geoffrey Rehnert, was drenched dark with sweat under his arms.
"Mitt was struggling," Rehnert says. "And he wasn't used to struggling."
In time, Romney would lead the shaky start-up from a staff of seven people managing $37 million to 115 people managing $4 billion in assets. During Romney's 15-year tenure, Bain Capital would post an astonishing record, on average doubling its return on realized investments every year. Thomas H. Lee, founder of cross-town rival Thomas H. Lee Partners, calls the company's performance under Romney "one of the great stories of American capital."
Romney would eventually use his business success as a platform for his political campaigns, stressing his leadership skills and data-driven management acumen. His critics would use his work in this little-understood world of private equity to paint him as a coldhearted profiteer, cutting jobs to line his own pockets.
But there would never be any argument about how perfectly Mitt Romney fit the image of the smooth and supremely confident executive, with never a hair out of place. Privately, his colleagues knew differently.
On his way to the top, Rehnert says, Romney sweat his way through the underarms of so many shirts that his colleagues came up with a term for it: "pitting."
A wanted man
Mitt Romney had long been seen as a hot commodity, even before he entered the job market.
In 1971, he enrolled in a new dual-degree program offered by Harvard Law School and Harvard Business School. He had originally planned to earn just his MBA. But his father, George, a former presidential candidate who was then serving as U.S. housing secretary, insisted a law degree would be more valuable. Ever the diplomat, Mitt Romney found a way to please his dad and himself.
The compromise quickly paid off. Consulting firms and investment banks were always on the hunt for future employees among Harvard's best and brightest, and the select group enrolled in the university's competitive dual-degree program seemed an obvious place to start.
Not long after he arrived on the Cambridge campus carrying a beat-up briefcase that bore his father's initials in faded gold, Romney appeared on the radar of the Boston Consulting Group. Charles Faris was assigned the task of wooing Romney for BCG, then one of the hottest companies in the nascent consulting field. Over the course of Romney's four years at Harvard, Faris kept in frequent contact with the clean-cut grad student, treating him to occasional lunches and dinners, and inviting him to company events.
As Romney neared graduation, Faris found plenty of competition in trying to hire him.
"He was an outstanding recruit with exceptional grades, and he was the very charming, smooth, attractive son of a former presidential candidate," Faris says. "So everybody was bending over backward to get their hands on him."
Faris's flattery paid off. Shortly after Romney left Harvard in 1975, having graduated with honors from the law school and in the top 5 percent of his class at the business school, he began work at BCG.
He approached his consultant job with the complementary skills that had been sharpened during his parallel lives at Harvard. His legal training taught him to ask challenging questions, to play the role of devil's advocate, and to use an adversarial process in an effort to get answers. Business school developed his ability to reconcile conflicting data and differing points of view. It also helped shape him as a leader and team-builder.
Companies nationwide were clamoring to hire BCG's consultants, who analyzed mountains of financial data to lower costs, improve production, and gain market share. In his new job, Romney rapidly established a reputation as a rising star.
But as the 1970s wore on, one rival firm began to eclipse BCG: Bain & Company.
'Mitt had a presence'
In 1973, Bill Bain was a top executive at BCG on track to one day take over the company. Instead, Bain broke away to start his own shop.
Four years later, Bain & Company was one of the nation's hottest consulting firms. A former colleague of Bain's at BCG recommended Romney, telling him, "I don't believe you have anybody better than he is."
Bain remained circumspect. He needed consultants who had the maturity and seriousness to win the confidence of experienced executives running big companies.
But during their interview Romney impressed Bain, not just by how he responded to questions, but also by the ones he chose to ask.
With all of his success at BCG, Romney asked Bain, how had he found the nerve to leave?
"It was a flattering question," Bain says now, still impressed despite the distance of three decades. "Mitt had a presence so that you took him seriously, but he acted as if he took me very seriously."
In 1977, Romney jumped to Bain & Company.
Most consulting firms at the time produced thick reports, made recommendations, and then moved on to other clients. The Bain way started with "strategic audits." Bain consultants compiled information from unconventional sources such as former employees and competitors, and looked at it from every possible angle.
Then came the hard part: persuading companies to adopt new strategies. Bain consultants worked closely with clients until the recommendations were put in place.
Romney embraced the firm's approach, and rose quickly. At one of his first clients, Monsanto Co. of St. Louis, Romney learned the technical aspects of the chemical business so thoroughly that he sounded as if he had gone to engineering school instead of business school, says Ralph Willard, the senior Bain partner on the account.
After two visits, Willard says, Monsanto's executives were bypassing him and going directly to Romney. The then-chief executive of the sprawling chemical company, Jack Hanley, says Romney was that good.
"Mitt's a very quick study," Hanley says. "Every contact we had, I came away impressed."
Bill Bain, meanwhile, was exploring a new frontier for his own firm — and for Romney.
His notion: combining Bain's consulting expertise with investments in promising or underperforming firms. Bain consultants found that the stock prices of its clients had risen significantly higher than those of competitors. While Bain & Company had been well paid, Bill Bain and his senior partners decided they were reaping only a small share of the value of their work.
The new venture would be called Bain Capital. It would buy companies, retool them with Bain techniques, and resell them at a profit. The partners quickly agreed Romney should lead the new enterprise. Although still in his mid-30s, he was among the firm's best consultants. More important, Bain trusted Romney to be prudent and not tarnish Bain's name.
After all, Bain & Company was taking a big risk. If Bain Capital-run companies failed, using the "Bain way," clients might well reconsider paying big fees for Bain & Company's consulting services.
In early spring of 1983, with the sun pouring into his office in the Faneuil Hall marketplace, Bain offered Romney the job that would make his career. Romney balked, catching Bain off guard.
Romney explained that he didn't want to risk his position, earnings and reputation on an experiment in investing. The offer was appealing, Romney recalled in a recent interview, but he wasn't going to make such a decision in a "light or flippant manner."
So Bain sweetened the offer. He guaranteed that if the experiment failed, Romney would get his old job and salary back, plus any raises handed out during his absence.
Romney had one more concern: the impact on his reputation should he prove unable to do the job. In the end, Bain agreed to craft a cover story if necessary, promising to bring Romney back to the consulting firm and explain Romney's return as a matter of his being more valuable to Bain as a consultant.
"So," Bain says, "there was no professional or financial risk."
Defined by caution
Bain Capital initially set up down the hall from Bain & Company, and Romney pulled together a team from the firm's brightest young consultants. Romney ran the operation as the general partner, answering to Bain.
Their first job: raise the investment fund. Romney and a Bain Capital partner, Coleman Andrews, went on the road, using overhead projectors and Romney's mastery of details to woo investors. During one pitch, Andrews recalls, an investor asked if Romney would spend money on fancy offices and big expense accounts.
Andrews told him not to worry about Romney. "He pops his own popcorn and takes it to the movies."
Frugal with his own money, Romney insisted that Bain Capital be especially careful with other people's money.
The office was Spartan, furnished with gray metal desks. When partners traveled, they flew coach. Andrews recalls that the rule for meals on the road was: "They should be nourishing, but not memorable."
Romney's cautious approach quickly defined Bain Capital. He worried all the time. "He was troubled when we didn't invest fast enough, he was troubled when we made an investment," Andrews says. "He never wanted to fall short on commitments or representations made to investors."
Quite apart from the swashbuckling era of 1980s corporate deals, where one buyout firm spent only six weeks to hatch a $25 billion takeover, decisions at Bain Capital were tested and retested, debated, discussed, and challenged. Any partner could veto a deal, so the case had to be strong enough to convince them all.
At weekly meetings, Romney took deals apart, found weak spots in the analysis, and argued against going forward. He was so relentless in playing the role of devil's advocate that partner Bob White would later admit to sitting in the meetings occasionally wanting to "punch him in the nose."
By 1986, Bain Capital had invested very little. But that year proved a turning point, with major deals that put the firm on the map. The best known was Thomas Stemberg's office supply company, Staples Inc.
At the time, companies bought most of their pens, pencils and paper from small stationers, usually at significant mark-ups. Stemberg, a former supermarket executive, wanted to change that, but couldn't find investors.
One venture capitalist scoffed at Stemberg, "Why in the world would anyone try to save money on paper clips?"
But Stemberg found someone who would.
Intrigued by the concept, and how it spoke to his inherent frugality, Romney called lawyers, accountants and other professionals to gauge office supply spending, only to conclude Stemberg had overestimated the size of the market.
"Look," Stemberg told Romney, "your mistake is that the guys you called think they know what they spend, but they don't."
Romney and Bain Capital went back to the businesses and tallied up invoices. Stemberg's assessment of the market seemed right after all.
On May 1, 1986, backed by an initial Bain Capital investment of $650,000, the first Staples opened in Brighton. Explosive growth followed. Today, Staples is an $18 billion company.
Bain Capital, meanwhile, enjoyed a nearly sevenfold return when it sold its stake a few years later, reaping more than $13 million from a total of about $2 million invested.
Although Romney would later point to Staples as a key example of the kind of job-creating, forward-looking enterprise he made his living in, venture capital deals like Staples soon became only a small part of his firm's business, in favor of leveraged buyouts.
Venture deals invest in start-ups in the hope they hit it big. Leveraged buyouts combine small amounts of investors' money with large amounts of borrowed money to buy established companies.
Leveraged buyouts played to Bain Capital's analytical strengths and Romney's caution. If venture investing requires vision, leveraged buyouts demand precision. To determine how much to pay, and hence to borrow, buyout firms must figure out how much cash their targets can generate. Overestimate cash flow by just a few percentage points, and the company misses debt payments and plunges into bankruptcy.
Despite the success of Staples, the venture capital world had too many unknowns for Romney's taste. So he steered the firm to focus squarely on leveraged buyouts. "I didn't want to invest in start-ups where the success of the enterprise depended upon something that was out of our control," Romney recalled recently, "such as 'Could Dr. X make the technology work.'"
Bain Capital applied the "Bain way" to increase the value of the firms it acquired.
In 1986, it bought Firestone Co.'s wheel-making division, renamed Accuride. Bain Capital revamped production, restructured executive pay, and offered discounts to customers that gave Accuride all their business, instead of splitting it among competitors, according to the book The Loyalty Effect, a collection of business case studies written by a Bain & Company director.
Accuride's earnings rose 25 percent. Eighteen months later, Bain Capital sold Accuride to mining conglomerate Phelps Dodge Corp. Bain's $5 million investment had ballooned to more than $120 million.
"Bain Capital is the model of how to leverage brain power to make money," said Howard Anderson, a professor at MIT's Sloan School of Management. "They are real first-rate financial engineers."
But, he says, "They will do everything they can to increase the value. The promise (to investors) is to make as much money as possible. You don't say we're going to make as much money as possible without going offshore and laying off people."
Not that Anderson has a problem with this approach. In addition to being a business school professor, he has also been a Bain Capital investor.
Despite being in charge, Romney usually didn't put together the firm's deals. Instead, he was the careful manager, testing assumptions and keeping his talented, aggressive group of partners together.
Romney opened meetings with corny jokes. At Stanford, Rehnert had been inducted into the honor society, called Order of the Coif. Romney would wonder aloud why he hired someone who went to barber school.
But his aw-shucks manner masked a determination to lead others his way. During his meetings with the Bain Capital partners, Stemberg got to see how Romney worked. "He was always very 'shucks, gee willickers' in how he'd say things. 'Gosh, you know, it strikes me that if we did such and such, we could deal with Arthur's concern, we could deal with Marty's concern, and Tom, I think it would be consistent with the strategy you wanted to pursue.' And mentally you'd say, 'Thank you very much."'
In 1990, during one of Bain Capital's weekly business review meetings, partner Stephen Pagliuca and others pitched the acquisition of the high-tech research firm Gartner Group. Romney cut through the clutter of statistics to pose one penetrating question: What would Gartner's focus be?
That question prompted a new round of analysis, which ended up shaping Bain's purchase and revamping of the company. After Gartner went public, Bain eventually saw a 1,500 percent return on its investment. It was a stunning figure by the standards of most investments, but hardly unheard of in the world of leveraged buyouts.
Costly associations
Bain Capital soon began cashing out its investments, and eventually the $37 million fund returned more than $200 million.
Bain's second fund topped $100 million, primarily from wealthy individuals, but it got off to a rocky start. Bain Capital lost most of the money in early leveraged buyouts. But the firm soon regained its touch.
In one 1988 deal, known as Specialty Retailers Inc., Bain Capital used junk bonds from Drexel Burnham Lambert to finance the purchase of two Texas retailers. Junk bonds have low credit ratings and are therefore considered high risk, but also usually have high yields. A few months earlier, in connection with insider trading scandals, the Securities and Exchange Commission had sued Drexel and the man who built its junk bond business, Michael Milken.
Bain Capital went ahead anyway. Romney had kicked off the road show for potential investors, appearing at Milken's Beverly Hills headquarters. When Bain Capital was through with the deal, it had converted its $10 million investment into a payout that exceeded $180 million.
It was just one more seemingly unfathomable payout for the firm, and Romney. But it would come at a cost.
Although Bain Capital was far removed from the scandals that brought down Drexel and Milken, its association with the junk-bond king came back to haunt Romney when he eventually ran for office. His political opponents would use his Drexel connection to depict Romney as a greedy corporate raider. Other deals from this period would also bring him political baggage.
Perhaps the most legally thorny was Bain Capital's 1989 purchase of Damon Corp., a Needham medical testing firm that later pleaded guilty to defrauding the federal government of $25 million and paid a record $119 million fine.
Romney sat on Damon's board. During Romney's tenure, Damon executives submitted bills to the government for millions of unnecessary blood tests. Romney and other board members were never implicated.
More than a decade later, when Romney was in pursuit of the Massachusetts governorship, his Democratic opponent Shannon O'Brien accused him of lax oversight at Damon and failing to report the fraud.
Romney replied that he had helped uncover the illegal activity at Damon, asking the board's lawyers to investigate. As a result, he said, the board took "corrective action" before selling the company in 1993 to Corning Inc.
But court records suggest that the Damon executives' scheme continued throughout Bain's ownership, and prosecutors credited Corning, not Romney, with cleaning up the situation. Bain, meanwhile, tripled its investment.
Romney personally reaped $473,000.
Money made, jobs lost
In many ways, Damon shows the pitfalls of launching a political career from the buyout industry.
Maximizing the financial return to investors can mean slashing jobs, closing plants, and moving production overseas. While Bain Capital helped expand companies that created jobs, the firm also engaged in some of the business's harsher practices.
During the 2002 gubernatorial campaign in Massachusetts, Democratic candidate Thomas Birmingham charged that Romney had "amassed a fortune on the backs of working people."
Fair or not, the criticism gets at an essential difference between buyout firms and companies rooted in their communities, says Ross Gittell, a professor at the University of New Hampshire's Whittemore School of Business and Economics.
Companies like Bain Capital typically cash out of their investments in three to five years, and "usually have less of a stake in the community, in terms of employment, service on nonprofit boards, your physical and environmental impact," Gittell says. "The objective is: make money for investors. It's not to maximize jobs."
Few Bain Capital deals exposed that objective more starkly than Ampad.
In 1992, Bain Capital acquired American Pad & Paper, or Ampad, from Mead Corp., embarking on a "roll-up strategy" in which a firm buys up similar companies in the same industry in order to expand revenues and cut costs.
Through Ampad, Bain bought several other office supply makers, borrowing heavily each time. By 1999, Ampad's debt reached nearly $400 million, up from $11 million in 1993, according to government filings.
Sales grew, too - for a while. But by the late 1990s, foreign competition and increased buying power by superstores like Bain-funded Staples sliced Ampad's revenues.
The result: Ampad couldn't pay its debts and plunged into bankruptcy. Workers lost jobs and stockholders were left with worthless shares.
Bain Capital, however, made money — and lots of it. The firm put just $5 million into the deal, but realized big returns in short order. In 1995, several months after shuttering a plant in Indiana and firing roughly 200 workers, Bain Capital borrowed more money to have Ampad buy yet another company, and pay Bain and its investors more than $60 million - in addition to fees for arranging the deal.
Bain Capital took millions more out of Ampad by charging it $2 million a year in management fees, plus additional fees for each Ampad acquisition. In 1995 alone, Ampad paid Bain at least $7 million.
The next year, when Ampad began selling shares on public stock exchanges, Bain Capital grabbed another $2 million fee for arranging the initial public offering - on top of the $45 million to $50 million Bain reaped by selling some of its shares.
Bain Capital didn't escape Ampad's eventual bankruptcy unscathed. It held about one-third of Ampad's shares, which became worthless. But while as many as 185 workers near Buffalo lost jobs in a 1999 plant closing, Bain Capital and its investors ultimately made more than $100 million on the deal.
The 1990s proved really good for Bain Capital and partners, whose annual earnings hit seven figures. The firm raised several more funds, and acquired companies with some of the best-known brand names, including Domino's Pizza and the Sealy mattress company.
One deal, the acquisition and sale of credit report provider Experian, netted Bain $200 million in two months.
Despite this success, Romney remained cautious. In 1996, Bain Capital launched a hedge fund, a lightly regulated investment pool focused mainly on stocks, for the firm's partners and some clients. When the fund lost money in the first few months, Romney wanted to close it and return all the money invested, according to two colleagues. Other partners persuaded him to wait, and the fund took off, growing from less than $100 million in 1996 to nearly $7 billion today.
In 1997, he balked again, at the acquisition of a Los Angeles video distributor and movie producer that would be renamed Artisan Entertainment and become famous for producing the movie "The Blair Witch Project."
Romney worried that Bain Capital's image would suffer from the perception it "had gone Hollywood," according to Rehnert, the Bain partner who proposed he deal.
Romney had another problem. The studio had an extensive library of R-rated films, which The Church of Jesus Christ of Latter-day Saints discourages its members from watching.
Rehnert calmed Romney's image concerns by enlisting a Chicago firm to join the deal, sharing the risk and deflecting attention from Bain.
Romney, balancing his duty to make money for his investors with his religious beliefs, let the deal go through, but declined to co-invest his own money, which partners usually did.
"I didn't want to profit from a studio that made R-rated movies," Romney said recently.
By the time Bain Capital sold its interest in Artisan in 1999, it had more than tripled its investment.
A big leap
Romney's most memorable chapter during his Bain Capital years took place while he was on leave.
In the mid-1980s, Bill Bain and other founding partners of the consulting firm Bain & Company had set up an employee-stock ownership plan, or ESOP, to cash out some of their stakes. Bain was planning for his eventual retirement, so the firm borrowed heavily to buy a slate of shares belonging to him and other founding partners.
When a recession hit in the late '80s and corporations cut back on consulting services, Bain & Company's revenues plummeted. Soon, the firm was struggling to pay its ESOP debt.
With Bain & Company sinking, Harry Strachan and other younger partners turned to Romney to try to rescue the firm. They believed he had the standing with founding partners to negotiate a financial restructuring.
Over several weeks, Romney managed negotiations with the banks and among the partners. Tempers sometimes flared. Some senior partners argued that the younger partners were ungrateful. Some younger partners insisted the founding partners had hidden details of the ESOP to line their pockets.
But Romney kept his cool, Strachan recalls, sensing when he had to get an agreement — or lose the deal altogether.
The moment came when negotiations produced a package in which Bain and the founding partners would give up control of the firm, turning back $30 million they had taken from the ESOP and $100 million in notes they held against the firm, Bain recalls.
Romney stayed on as chief executive.
Despite his success at Bain Capital, it was a big leap for Romney, going from running a firm that at the time had about two dozen employees to one with about 1,000 worldwide. He immediately applied the techniques that Bain Capital had learned while restructuring the companies it acquired. He began with a road show, traveling to Bain & Company offices around the world to rally employees.
He put in a new governing structure, opened up the firm's finances to all partners, and revamped the compensation system.
The firm was so close to missing payroll that Romney stopped payment on checks sent to vendors, promising to pay them later. He renegotiated debt with banks and leases with landlords. He carried out about 200 layoffs that were announced just as he took on the job.
The pressures were immense. Just as in the early days of Bain Capital, Romney would peel off his suit jacket and his shirt would be soaked in sweat, says Rehnert, the Bain Capital partner who helped Romney during the transition at Bain & Company. Sitting at his desk, Romney would catch Rehnert's attention, and start flapping his tie.
Yet Romney got it done, stabilizing the consulting firm and turning it over to new leadership in 1991. He returned to Bain Capital, where he worked until he ultimately left in 1999 to run the Salt Lake Olympics.
Rehnert says the experience of saving Bain & Company changed Romney. He never saw him flap his tie again.
Next: Rising expectations
Contributing: Beth Healy, Scott LaPierre and Ann Silvio.