TEXT: Berkshire Eagle editorial about Bain Capital and KB toys

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ORIGINAL HEADLINE: Greed, debt, Bain and the death of KB

Posted:   09/09/2012 12:07:09 AM EDTUpdated:   09/09/2012 12:07:10 AM EDT
Sunday September 9, 2012In trying to change the subject from Bain Capital, Republican presidential candidate Mitt Romney has talked a lot about reducing the nation’s debt. The irony of this strategy, according to Matt Taibbi in the Sep tember 13 issue of Rolling Stone, is that Mr. Romney "is one of the greatest and most irresponsible debt creators of all time." The impact of that debt creation strategy was seismic right here in Pittsfield with the demise of KB Toys, which Bain Capital purchased in 2000. Mr. Romney was supposedly gone from Bain a year earlier but the New York Times has revealed that he was an investor and beneficiary for 12 more years.

Much has been said and written this campaign about Bain Capital, a company that doesn’t build anything tangible but buys companies that do, usually struggling ones, redesigns them, and sends them off to sink or swim. Not enough has been said and written about Bain’s strategy of saddling these companies with huge debt that forces them to take all the risk while Bain profits through the magic of "dividend recapitulations" regardless of the fate of those companies.

In Mr. Taibbi’s article, entitled "Greed and Debt. How Mitt Romney and Bain Capital staged an epic wealth grab, destroyed jobs -- and stuck others with the bill," Heather Slavkin Corzo, the senior legal policy adviser for the AFL-CIO, succinctly described this complex strategy with an analogy. "The dividend recap is like borrowing someone else’s credit card to take out a cash advance, and then leaving them to pay it off," said Ms. Corzo.

Which brings us to KB, whose headquarters were in Pittsfield. It’s a sad and familiar story here in the Berkshires recapped and elaborated upon by Mr. Taibbi, who in his research visited an "Irish pub" here (we’ll bet it was Patrick’s) to meet with former high echelon employee Lenny Patnode, who was laid off in 2008 after 38 years with KB without a day’s severance.

Bain purchased KB for $320 million, with large banks financing all but $18 million of the purchase. About a year and a half later, Bain claimed its dividend recapitulation, forcing KB to redeem $121 million in stock and borrow $66 million. Of this total, $83 million went to Mr. Romney and other Bain owner and investors. KB slid into bankruptcy, never to re-emerge, while as Mr. Taibbi writes, Bain earned a return of at least 370 percent on its deal.

KB’s top management could have made a fuss but had millions of reasons for silence. CEO Michael Glazer received an $18.4 million bonus from Bain to smooth the deal and CFO Robert Feldman claimed a $4.8 million bonus. KB employees hit the bricks, most or all without severance packages or health insurance.

There is no denying that KB had a problems independent of Bain. It lost its prestige niche when it overexpanded into second-tier malls and was underpriced by big discount chains like Walmart. It didn’t react quickly to the advent of video and cell phone games. Bain, however, never offered KB Toys a strategy for survival, nor could it. There are no toy experts at Bain. Bain’s expertise is in making money for Bain, and burdened by debt thanks to Bain, KB Toys was doomed even it had developed a coherent business plan. An important and unique Berkshire company was gone, leaving an empty building downtown and loyal employees like Lenny Patnode out of work.

"In microcosm, the KB fiasco speaks to why corporate America is held in such low regard today," The Eagle stated in an editorial of January 27, 2009. The editorial was reacting to the awarding of cash bonuses to KB executives charged essentially with the task of shoveling dirt on KB’s grave but it also came in the context of the ongoing U.S. economic meltdown caused by the greedy Wall Street firms operating on the Bain philosophy of corporate profits first and ethics and fairness be damned. Mr. Romney can’t run from his record at Bain where debt was a business strategy that cost workers in Pittsfield and elsewhere their jobs. He’ll have to answer for it.

EDITORIAL: "Greed, debt, Bain and the death of KB (Toys)"

By Bill Densmore

The death of KB Toys, and the involvement of Bain Capital, is a rich story about how our system of capital formation works and why we may need corporate rules changes.  A Sept. 9 editorial in The Berkshire Eagle, brings it to the fore. First, a little background. (If the link is stale, try HERE.)

Rolling Stone magazine recounted the history of KB Toys in an Aug. 29, 2012 piece on Mitt Romney and Bain Capital entititled: "Greed and Debt: The True Story of Mitt Romney and Bain Capital." by Matt Taibbi.  

In a nutshell, KB thrived in the late-20th-century U.S. retail boom, outgrowing the Lee, Mass., headquarters where its family owners began and constructing an anchor-commercial office building in downtown Pittsfield, 20 miles north. But eventually the competition with the likes of Toys 'r Us, Wal-Mart and others proved too much, and KB was sold. Later, it was sold again to a group headed by Bain Capital and ultimately went bankrupt.

The Eagle (circ. 25,800, daily), in Pittsfield, Mass., once won a Pulitzer Prize for editorial writing. That was when it was family owned and its newsroom was about three times the size it is today. Since the mid-1990s the paper has been owned by MediaNews Group Inc., the Denver-based chain built and once controlled by Dean Singleton.

MediaNews Group went through bankruptcy a couple of years ago because it had amassed over $900 million in debt pursuing a strategy of buying up U.S. newspapers when Wall Street judged them worth relatively fabulous sums. But now the bottom has fallen out of newspaper print advertising and those debts became unsustainable.

The Eagle was sold to MediaNews by the Miller family in part because the family amassed debt it couldn't cover by renovating and moving into a gigantic factory complex in downtown Pittsfield. Their aim was noble -- they wanted to to restore an abandoned stationery-manufacturing plant to productive use. But they couldn't find enough commercial tenants for the cavernous building sections not neede dby their newspaper operations.

Pittsfield is a once bustling factory town dominated by defense and electric-transformer divisions of General Electric Co. GE and most other industrial jobs are gone from the city now, which is clawing its way back by emphasizing tourism, arts, and service businesses by serving as the retail core of the Berkshires.

The Berkshires are the small-mountain part of Massachusetts, dotted with second-homes and culture attractions such as Tanglewood, Jacobs Pillow, the Clark Art Institute, Shakespeare & Co., the Massachusetts Museum of Contemporary Art, Hancock Shaker Village,  the Norman Rockwell Museum and at least three nationally-acclaimed summer theater companies.

Understanding this scenario -- a newspaper twice bruised by over-leveraged ownership, a city abandoned by industrial jobs, and a toy company built and hung on the excesses of a consumer economy, run through a Bain Capital restart machine which failed -- provides both context and iron for The Eagle editorial's conclusion:

"In microcosm, the KB fiasco speaks to why corporate America is held in such low regard today," The Eagle stated in an editorial of January 27, 2009. The editorial was reacting to the awarding of cash bonuses to KB executives charged essentially with the task of shoveling dirt on KB’s grave but it also came in the context of the ongoing U.S. economic meltdown caused by the greedy Wall Street firms operating on the Bain philosophy of corporate profits first and ethics and fairness be damned. Mr. Romney can’t run from his record at Bain where debt was a business strategy that cost workers in Pittsfield and elsewhere their jobs. He’ll have to answer for it.