Planet Money
12:01 am
Thu February 23, 2012

How Mitt Romney's Firm Tried — And Failed — To Build A Paper Empire

Originally published on Mon May 7, 2012 12:20 pm

Mitt Romney is campaigning as a businessman who knows how to turn the economy around — a skill he says he learned during his time turning companies around, as president of the private equity firm Bain Capital.

So today, we're going to take a look at two deals that Bain did while Mitt Romney was heading the firm. This afternoon, we'll tell the story of one of Bain's successes.

In this story, we look at one of the deals that didn't turn out so well.

The story of how Bain Capital tried — and failed — to build a paper empire starts with an ordinary legal pad. Yellow-lined paper, wide margins. The most innocuous looking thing in the world. The company that makes it has been around for more than 100 years. Its name is as boring as its product: American Pad and Paper. Ampad for short.

Private equity works sort of like flipping houses. You buy a house cheap, fix it up nice, and sell it for a profit. In the process, you make the whole neighborhood better. That's the idea.

When you buy a house, you put down a bit of your own money. But typically you borrow most of the money. That's what Bain did in 1992, when it bought American Pad and Paper: $5 million down, $35 million in bank debt.

"We were highly leveraged as a company," says Russell Gard, the guy who Bain brought in to run the company. "Like, squeaky leveraged. We were tight."

Around this time, office superstores were popping up everywhere, and Bain wanted to buy more companies to build Ampad into an all-purpose paper supplier for the big chains.

So Bain bought a hanging file folder company called SCM in Marion, Indiana.

Jerry Rayburn, who worked on the factory floor at SCM, remembers the day when Bain took over.

"We knew something was going on when, toward the end of the day, we saw all the security guards starting to surround the plant," he says.

Then employees were told the company had been acquired by Ampad, and they had all been terminated. They were told they were welcome to re-apply for their own jobs.

"You could hear a pin drop," Rayburn says. "Everybody was in shock."

Most people did reapply, but things were different. The union was over. Lots of employees took a pay cut. Plant rules were different. The workers went on strike.

Mitt Romney was on leave from Bain at the time, running against Ted Kennedy for a seat in the U.S. Senate. And the Kennedy campaign had a field day with that strike, featuring it in campaign ads.

Gard says Romney called him personally and told him to end the strike. He was emphatic. Gard said no. This is a long-term strategy. To become a lean company, things have to change at the Marion plant.

Ampad moved its hanging-folder manufacturing operation out of Marion, Indiana, to a plant in another state.

By now, Ampad had pads and folders to put them in. Next on the list: an envelope company.

Bain went back to the bank and borrowed a couple hundred million dollars. Most of the money went to buy the envelope company, but about $70 million went to pay Bain and its investors.

Not long after that, Ampad went public. Bain used the money from the IPO to pay off a chunk of debt. In 1996, American Pad and Paper had its best year.

In 1997, Ampad made another purchase: A printer-paper company called Shade Allied.

The company made continuous-form printer paper, for dot-matrix printers — that old kind of computer paper, with the little holes running down the side.

That purchase didn't turn out so well. And Ampad started having other troubles.

Asian companies came on the scene with cheaper products. The price of pulp jumped. Ampad's revenues started to fall. And they have to keep paying interest on all that debt.

In 2000 — four years after the IPO-- Ampad declared bankruptcy. Stockholders were wiped out (including Bain, which still owned about a third of the company). Lenders got back a fraction of what they were owed.

"You can't continue to leverage companies up," says Russell Gard. "At some point, there's going to be a breaking point."

Clearly, the story doesn't always end this way. If it did, the banks wouldn't keep lending private equity companies like Bain massive amounts of money.

And Ampad itself? The pad company?

You can still get an Ampad pad today. The company is now being run by another private equity firm. A firm that saw an undervalued company, and bought it at a good price.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

Mitt Romney has staked his campaign on his record in the private sector, saying he can turn the economy around as he turned around failing companies during his time leading the private equity firm Bain Capital. Today, we're taking a look at two deals at Bain. Later today on ALL THINGS CONSIDERED, a success story. This morning, a deal that did not turn out as planned. Zoe Chace of NPR's Planet Money team followed a paper trail.

ZOE CHACE, BYLINE: The story of how Bain Capital tried and failed to build a paper empire in the 1990s starts with this...

(SOUNDBITE OF SLAMMING SOUND)

CHACE: ...an ordinary legal pad. You've seen them - yellow-lined paper, wide margins, the most innocuous-looking thing. The company that makes them has been around for more than 100 years: American Pad & Paper. In 1992, Bain Capital buys the company that makes these pads.

RUSSELL GARD: When you had a legal pad from Ampad and you tore across the perforation, it tore across the perforation.

CHACE: They brought in Russell Gard to run it. Bain wouldn't go on the record for this story, but we found the guy in charge then. And Gard says in the world of notepads, Ampad was the Cadillac.

GARD: You get another manufacturer, you tear across the perforation, and that legal pad may leave half the paper on the header.

CHACE: Think of private equity like this: It's like flipping a house. You buy a house cheap, fix it up nice, sell it high. That's the idea. Bain Capital's idea was to take a company that makes notepads and use it to purchase folder companies, envelope companies, and build a paper empire. Office superstores like Staples and Office Max were popping up everywhere. Bain's new company would be the supplier.

So Bain puts $5 million down, borrows about $35 million in bank debt to start the paper empire. It's exciting and a little scary.

GARD: We were highly leveraged as a company, like squeaky leveraged. I mean, we were tight.

CHACE: At one point, it looked like they had actually run out of money before they'd barely begun. The night before a board meeting, Gard and his CFO spent a sleepless night in a Marriott Hotel, sweating it out before they realized they still had $500,000 in cash left. It still haunts him.

GARD: In fact, if I go into a Marriott that has a certain smell these days, I just have to change hotels, because there was a smell that night that, like, I've never gotten out of my head.

CHACE: Gard and his team start cutting costs. They negotiate with the paper mills. Instead of 30 cents a pound, they get it for 27. And they start to build the paper empire. Bain's next purchase? A hanging file folder company called SCM, in Marion, Indiana. Jerry Rayburn worked on the factory floor at SCM, and he remembers the day when Bain took over.

JERRY RAYBURN: We knew something was going on when we saw - towards the end of the day we saw all the security guards starting to surround the plant.

CHACE: Rayburn says they gathered everyone in a warehouse in the back, chairs all set up, and they were told Ampad is the new owner. And you've all been fired, but you're welcome to re-apply for your old jobs.

RAYBURN: Here's applications if you want to reapply for a job with Ampad. You could hear a pin drop. I mean, it was like everybody was in shock.

CHACE: Most people did reapply. But things were different. The union was out the window, benefits were cut, plant rules were different. The workers went on strike. And this is where the story comes back to include Mitt Romney. Romney was on leave from the firm at the time, 1994, to run for Senate in Massachusetts against Ted Kennedy. And the Kennedy campaign had a field day with that strike.

(SOUNDBITE OF POLITICAL ADVERTISEMENT)

UNIDENTIFIED MAN: Romney's firm bought a company called SCM, fired all 350 workers, told some they could reapply at a...

CHACE: Gard says Romney called him personally, told him to end the strike. He was emphatic. Gard said no. This is a long-term strategy. To become a lean company, things have to change at the Marion plant. Romney loses the election. Bain moves the hanging folder machines out of Indiana to other plants. Rayburn hates Romney for it, but he'll also tell you a lot of plants have closed in Marion, Indiana, not just the one that Bain Capital ran.

RAYBURN: We had Gen Corps. They're gone now. We had RCA. They're gone now. Adele Fiber, they're gone now. It was like we started the ball. We got the ball rolling. We were the first one.

CHACE: They had pads, folders to put them in. Next up: an envelope company. Bain went back to the bank and borrowed a couple hundred million dollars - most of it to buy the envelopes, but about $70 million for themselves and their investors.

Critics of private equity call that greedy. But you could also see it as a sign of optimism, that this strategy was going to be so successful, everyone would be making money hand-over-fist. And indeed, not long after that, the company goes public. Bain uses the money to pay off a chunk of debt, and American Pad & Paper is profitable at last - 1996, their best year.

Tim Needham was another executive with Ampad after the company went public. He remembers one last purchase: in 1997, a printer paper company, Shade-Allied.

TIM NEEDHAM: Everybody in the industry was stunned. I must have had 10 other computer paper companies call me and say, hey Tim, if you want some more capacity, I'll be happy to sell you my company right now.

CHACE: Why? Because Shade-Allied made continuous form printer paper for dot-matrix printers. You know, that paper you'd tear off the sides of it, had little holes, it would be overflowing from wastepaper baskets? Seemed like a bad move to Needham.

NEEDHAM: I had decided that company was an Edsel. It was a dog.

CHACE: To be precise, an Edsel was a car, a notorious commercial failure. And right here, in 1997, things do start to go wrong.

Despite Ampad's ambitions, the paper business turns out to be very competitive. Asian companies come on the scene with cheaper products. The price of pulp to make paper from jumps. Ampad's revenues flatten and start to decline. And the interest payments just keep coming.

By the time Office Depot stops buying their stuff, they're out of money. In 2000 - four years after the IPO - Ampad declares bankruptcy. Stockholders are wiped out, including Bain, who still had about a third of it. Lenders get back a fraction of what they're owed. I asked Russell Gard - who was out by then - what he made of all this, the ride he'd been on.

Is there a lasting value to what happened, and what is it?

GARD: No. My opinion is there was no lasting value. It was - no, no. No lasting value. Could have been, but you can't continue to leverage companies up, because at some point, there's going to be a breaking point.

CHACE: Clearly, the story doesn't always end this way. If it did, the banks wouldn't lend private equity firms like Bain massive amounts of money. Some investments do really well. And Ampad itself, the pad company?

(SOUNDBITE OF SLAMMING SOUND)

CHACE: In a way, it's like nothing ever happened. You can still get an Ampad pad today. Who's running the company? Another private equity firm. They saw an undervalued company, and they bought it at a good price.

Zoe Chace, NPR News. Transcript provided by NPR, Copyright NPR.