Bain Capital, KB Toys and 10,000 pink slips

The private equity firm's leveraged buyout of the now-defunct retailer calls into question Romney's claim to be a job creator.

By MSN Money Partner Nov 2, 2012 2:57PM

BananaStock, SuperStockBy Karen Aho, MSN Money contributor


For Diane Simpson, this presidential campaign has been almost too tough to watch.

Simpson, 53, lost her job three years ago when KB Toys, the company where she spent half her life, shut its doors for good. The toy chain had slid into bankruptcy in 2004 after being acquired by Bain Capital.


"It just brings it all back," she said. "It's still emotional."


Bain Capital is the famous -- critics say infamous -- investment giant founded and run so successfully by Republican presidential challenger Mitt Romney.


In his 15-year stretch as CEO, Romney gained a reputation as a talented and focused deal maker, helping Bain amass what is now a $66 billion portfolio. Romney's worth is estimated at $250 million.


Simpson and her former coworkers know, perhaps better than most, that the purpose of a leveraged buyout -- what Bain undertook with KB Toys in 2000 -- is not to create jobs or even to preserve them. It is to make money for investors.


And to that end, Bain fulfilled its mission. Bain Capital made 4.7 times its investment in KB Toys, according to published reports and a lawsuit filed against Bain by creditors.


"They have a fiduciary duty to their investors. They have no fiduciary duty to employees," said William Birdthistle, an associate professor at the Chicago-Kent College of Law who studies the private equity sector. "It's possible that jobs are a byproduct. But if I had to put money on it, I'd say it's far more likely that you'd lose jobs."


Securities and Exchange Commission documents obtained by Bloomberg News reveal thousands of job losses followed Bain acquisitions. At KB Toys, more than 10,000 workers nationwide received pink slips.


Which is why many of those former workers are asking: Why is Romney pointing to his record at Bain Capital and calling himself a jobs creator?


More than a dozen former employees of KB Toys agreed to talk to MSN Money for this story. Most said they are registered as Republicans or independents. Nearly all voted for a Republican presidential candidate in recent years, including George W. Bush and John McCain.


And each one holds Bain and Romney responsible for his or her job loss -- even the two former workers who are considering voting for Romney on Tuesday.


"No one begrudges him his wealth or his situation in life, but the way he got it was less than honorable," said Pam Malnati, a buyer of more than 10 years. "It was at the expense of a lot of people."


Bain takes over
Brothers Joseph and Harry Kaufman founded KB Toys as a wholesale candy business in 1922. The family business shifted to toys and, by the 1970s, focused exclusively on retail. The company succeeded by luring mall shoppers with outlet-price bins and brightly colored store fronts. At its peak, it had more than 1,300 stores.


In 2000, amid a changing gaming and retail market, then-owner Consolidated Stores sold KB Toys to Bain Capital in a leveraged buyout, also referred to as a private equity deal. Bain put up $18 million from investors as a down payment on the $303 million purchase price and borrowed the rest. KB Toys, essentially the collateral, paid the debt. Bain Capital declined to comment for this story.


In 2002, after strong Christmas sales, Bain took out dividend recapitalizations, according to court records and multiple news reports. “Bain made KB borrow heavily and redeem $187 million in stock to stay afloat and pay dividends to Bain's owners and investors,” according to The Berkshire Eagle.


KB executives were also rewarded: $18.4 million for CEO Michael Glazer, $4.8 million for CFO Robert Feldman, $3.3 million for senior VP Thomas Alfonsi, and nearly $1 million apiece for half dozen directors, according to the 2006 lawsuit and former employees.


“I did very well, but it was obvious that it was a bad deal from the get go just from a layman’s profit and loss perspective,” said one manager, who signed a confidentiality agreement and requested anonymity for legal reasons. “I kind of shook my head. When they took all the money out, I was like, ‘How’s this going to work?’ “


That year Wal-Mart and Target cut prices in a budding toy price war, and mall traffic dropped. Loaded with debt and with little operating capital, KB Toys' business was unsustainable, former managers say. 


“This would have been bad for KB regardless, but with the debt it was crippling,” said Josh Kosman, a private equities reporter who interviewed Bain Capital and KB Toys executives for his book, "The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis."


“They had no margin for error.”


Taking credit for new jobs
Political opponents have been using stories like that of KB Toys against Romney ever since his 1994 run for Ted Kennedy's Senate seat in Massachusetts. In his presidential bids, Romney has tried to distance himself somewhat from Bain, referring instead to his experience "in business" or "the private sector."


But the Romney campaign put Bain Capital back at center stage during the Republican National Convention this summer when it launched, which highlights a dozen Bain investments and credits Romney with helping to create 100,000 jobs. It cites large employers such as Staples, Sports Authority and Steel Dynamics.


Opponents debate whether Romney should get credit for all those jobs. Sometimes Bain was a minority investor. Or Romney had already left, or he never managed the company at all. Some jobs, like those at Staples, arguably displaced jobs at other small businesses.


Trying to quantify jobs numbers is practically impossible and highly subjective, experts say. Even the Romney campaign admits the 100,000 is a very rough estimate -- and low, according to the campaign.


More important, finance experts say, is the fact that the campaign tends to highlight companies in which Bain put up venture capital: high-risk, passive investments (Bain didn't manage Staples) in early companies that are projected to grow and add jobs.


"I worked with Bain Capital when I first started my company, back in 1995," said Peter Cohan, a business strategy teacher at Babson College, in Wellesley, Mass. "I proposed they buy a startup, and they said: 'We don't do startups. We don't like to take the venture risk.' They wanted to buy existing companies." Bain preferred leveraged buyouts, which are far less risky.


"By the early 1990s, Bain had become almost exclusively a leveraged buyout firm," Kosman said. "It was no longer making venture capital investments like the ones Romney touts on the campaign trail."


According to a Wall Street Journal  review of 77 Bain investments from 1984 to 1999, 22% filed for bankruptcy or shuttered within eight years. Of the 10 biggest moneymakers -- composing 70% of Bain's profits -- four ended in bankruptcy.


In a 2008 interview on Fox News, Chris Wallace asked Romney about the jobs that Bain Capital “didn’t save.” Romney replied: “There’s no question that if you’re in the business world and you’re trying to save a business that’s in trouble, that you’re not going to be successful 100 percent of the time.”


An open wound
It was a Tuesday in mid-December when the last 270 workers at the Pittsfield, Mass., headquarters were told KB Toys was shutting for good. Many would be laid off that Friday, in three days. Others would go in waves, as operations wound down over several months.


No one would get severance pay. There would be no COBRA, the employer health plan, because KB was bankrupt. It would take three to four weeks for unemployment insurance to kick in. Workers went to mandatory exit interviews in batches of six or eight at a time. One would start crying and the rest would follow, employees said.


"If you were middle management or on down, this is where you really suffered," said Len Patnode, who was laid off after 38 years. "They had no resources. They got their last paycheck and instantly went on unemployment."


The final KB Toys layoffs landed in the 2008-09 recession. Some workers pounded the pavement for months, even years, before finding work again. They put medical care aside, relocated, worried. One woman suffered a heart attack and, to pay bills and try to save her house, sold her car and took three jobs. For months she drove a riding lawnmower to work.


The campaign "opens up that wound again," said the woman, Bev Larabee. "It kind of makes me think about the things that we've lost."


Regarding KB Toys, the Romney campaign said only that Romney was not at Bain Capital at the time, having relinquished his duties prior to the 2000 purchase.


"He left in February of 1999 to go turn around the Olympics," said Michele Davis, a campaign senior adviser. "As the founder of the company, it took a while to unwind. . . . He had no role in operations of investments."


However, as the Boston Globe reported in July, public Securities and Exchange documents filed by Bain list Romney as the firm's chief executive and chairman through 2002, with Romney "even creating five new investment partnerships during that time."


Perhaps more importantly, experts say Bain Capital was carrying out the policies honed under Romney.


“A lot of us, when we get together, we remember those days and it just makes us mad. It seems like only our area knows the personal side of this,” said Paul McDonough, a senior systems program laid off after 23 years. “Bain made out with millions, but 10,000 people lost their jobs.”


Editor's note: This story has been updated to include more details about Bain's investment in KB Toys.

Nov 5, 2012 1:20PM
and how about MF global and 1.4 billion vanishing? and nobody will admit it was stolen. kinda like bengazi when nobody admits what happened. i think i see a pattern here.
Nov 5, 2012 11:48AM
I wonder if this politically motivated? Just stick to reporting the news not making the news.
Nov 5, 2012 10:55AM

Liberal lamestream media MSN attempting to influence the election.  By tuesday evening these  "contributors" should be let go for their inability to portray reality as it is.   An impartial media is even more important to the American economy and its' citizens than 100 Bain Capitals.  I think this reporter must  be in  training to write for  Chavez, Putin, Obama, or Castro.  A tin horn reporter working for peanuts thinking they might actually be able to offer a conclusion or something of which I have no clue. .  Give us all a break, go on vacation.

Nov 5, 2012 10:00AM

Anybody who would vote for Romney with his track record is out is out of their mind.Of course,

most people who are voting for Romney are racist, we all know that,

Nov 5, 2012 9:48AM

If u truly understands the role Bain plays in our society u know that these bottom feeders will do anything for the almighty buck. No remorse, No empathy, No compassion.

They bleed every drop of money they can as fast as they can. Then leave the scraps of real peoples lives brushed off like dust from an old attic coat. Then, off to do their next deal. Never contributing to society a positive drop of energy. With the "take advantage" mentality of carpetbaggers they move on rewarding themselves and laughing all the way to the bank. And in this case, wearing their strange underpantys praying to God living on Kolob that the next deal will be even better than the last.

Nov 5, 2012 9:42AM

If u truly understands the role Bain plays in our society u know that these bottom feeders will do anything for the almighty buck. No remorse, No empathy, No compassion.

They bleed every drop of money they can as fast as they can. Then leave the scraps of real peoples lives brushed off like dust from an old attic coat. Then, off to do their next deal. Never contributing to society a positive drop of energy. With the "take advantage" mentality of carpetbaggers they move on rewarding themselves and laughing all the way to the bank. And in this case, wearing their strange underpantys praying to God living on Kolob that the next deal will be even better than the last.

Nov 5, 2012 8:30AM
KB was a train wreck a long time before Bain got involved. 
Nov 5, 2012 12:53AM
It's hard for our whole family to kind of understand this very closed race for the presidency. Romney has promised to literally modified Medicare to a Voucher system that smells a bad deal, and he will not explained it fully, for the old and future old! Our Social Security is floating in mid air, as he wants to privatized it, this only means that some gangsters and rich dudes will keep trillion of dollars in their coffers and perhaps if you behave well they will issue you monthly check, this applies to the citizens in SS now, and the future ones, so don't think you will be except from the chaos. But of course! All of it depended on where your money is kept, if in the Stock market, a sudden crash, and you can will kiss good bye to all you money, and years of savings! So, this is pointing to "American citizens you are truly very stupid". We all have the horrible experience of Bush, the years of unnecessary wars, Iraq, and Afghanistan, our many heroes killed in combat, and the thousand of Iraqis killed that did not have anything to do with it! Over thirteen trillion dollars lost! The losses of jobs send overseas by Romney Bain Corporation, and other large Corporations, also the tax cut for the rich, and the American citizens still, kiss the hand of the perpetrators by keeping him (them), in the present presidential race. We Americans, perhaps thousands all of us, all have the Amnesia Romney has, and the final mistake will be the electing Romney, it will bring all of us to the final Avenue of "Perdition". When Romney, that did not want to show us, the American people his many years past Tax filings, not knowing if he paid any taxes or not, and we still want to vote for him! During the Vietnam war he was in a transferred to France from his Mormon Church, and he was in good health, fully enjoying French hospitality, while our heroes died by the thousands. During the Iraq, and Afghanistan wars his sons were in some type of so called Missions by the Mormon church, while our true American heroes, and naturalized citizens died in the fighting field! He does not want FEMA, he is against women right's same pay same work, You are pregnant by rape, by a perverted, and have his baby for life, as you have no decision to make, and if you abort the creature you go to jail for murder! The best of this country, our women will not get equal pay for equal work! The rich will have a juicy tax cut, while we, the middle class will pay for it by taking all our tax deductions away! So it goes stupid American that live in the impregnated atmosphere of Bush, and Romney, and the liar of Ryan. Too bad you will all ignorant ones, all of you morons, force us to breath the same polluted junky presidential air that you will breathe if you put him (them), in the White House! If he gets there you all know you are soon in a fifth World Country!
Nov 4, 2012 10:28PM
I cannot understand the culture of wealth worship here, especially the worship of those who have "excessive" wealth (apply your own definition, but for me it's anything over about $80 million, which is $10 mil each for Mom and Dad and 6 kids.  It's great to get wealthy, and feel secure, but when it gets up much above $100 million it distorts our democracy--and puts too much power in the hands of too few.  Any annual income more than about $3-5 Mil is excessive.  There are too many people here that are homeless and having a hard time getting enough to eat.  I am comfortably well-off and retired.

Most of the ultra-rich are totally out of touch with life.  Give them a choice of giving most of it to worthwhile charities or educational institutions--or take it away and fix the bridges and roads; and feed our destitute and homeless, as well as provide free college educations with the monies.  Mitt Robme and his ilk are not magnificent geniuses--are above average and lucky.  Many of them inherited enough wealth to invest it well, because their parents taught them how to do it.

Nov 4, 2012 7:03PM

Under Obama Auto deal, before Iknew my stock has gone to zerO. I lost 100 % and there was nothihng to do. My stock broker notified me that existing GM stocks were all gone. Then they created new stock. But that you have to put up `100 % like you are buying any stocks.


It hurts but that is our system and I invested knowing our capitalistic system. These things happens. I had seem when Merry Go around  went under. Lots of my friends lost jobs. I also know Arthur Anderson. We had a party couple of days before and we were telling dude working fo Arthr how jealous we were at his good luck. In coupld of days he had tp pack up and walk out.


If we do not want to have leverage buy out, Obama should have guts and capability to out law it. But beyong that guy who spends one Billion to win Presidencey and then in 4 years creates only 200,000 new jobs is not any better than Bain. But Obama also operated under the system we have.


In China also companies do go under and employee lose their jobs. Remember WT Grant and Woolworths? **** happens.

Nov 4, 2012 12:24PM
How about the fact that most if not all that happended was after Roney was no longet actively managing the company.  Ask the GM bondholders and retail auto dealers how they were treated inteh Obama driven GM and Chrsyler bankruptcy and the taxpayewrs are on the hook for the shortfall of not paying it back.  MSN must reallybe desperate and worried to publish this garbage right before election day. 
Nov 4, 2012 2:10AM
"Bain didn't manage Staples."  And that's a good thing.
Nov 3, 2012 8:37PM
Bain executive: cutting jobs was a strategy
Nov 3, 2012 5:09PM
I guess when facts hit the MITT WITTs about job creation ? LOL Their man is a true joke ! Like i have been saying all along ! Show just one job the Mitt Witt made ?? LOL LOL...
Nov 3, 2012 4:54PM

KB Toys , a small shop always in a high price rent mall was beat out by Wal Mart and Toy R Us,


Where would you go shoppping for toys ?


Put the blame where it really needs to be ! ! !


Roadhouse..........You are correct about the problems starting before Obama was elected. His first budget didn't start until October 1, 2009. If you recall the Federal Budget runs October through September 30. So those elected November 6, 2012, will not take office until January 2013, and will be responsible for the FY 2014 budget that starts October 1, 2013. The real problem that we, The US, is facing started with the election in November 2006. The Democrats won both the House and Senate in November. Then in January 2007 they put Nancy in charge of the House and Harry for the Senate, and then went to work on the FY 2008 budget that started October 1, 2007. For the most part everything was been down hill until October 1, 2011, when the FY 2012, prepared by a Republican House started. IMHO it is not who is in the White House but who controls the House and Senate that can make or break the economy.

Nov 3, 2012 12:17PM
Jealousy is not becoming and it is destructive.  When one spends too much time disliking others for what they have one robs oneself of precious time.  This is the most degrading election of all time.
Nov 3, 2012 12:14PM
One cannot believe anything liberal news sources say about a conservative candidate.  One cannot believe everything said by conservative news sources.  The liberal news people pride themselves on how imaginative their lies are; the conservatives are fighting back by stretching the truth a little.   What we should all remember is that this is a real election not a hollywood show.  If we are not careful, we could wake up one morning to discover that we live in a socialists society dominated by the social elete who have all the power and the money.  All the rest of us would be equally poor people without the opportunity to excel in life. 
Nov 3, 2012 12:01PM
Bain privatized profit for their benefit and their benefit ONLY, then socialized the losses on US taxpayers via unemployment payments, welfare, food stamps, etc. and the loss of revenue to the city of Pittsfield for business taxes and parking lot revenue payments, and so on, and so on, and so on... hundreds hit the social safety nets all at once, while Mitt via Bain, Glazer, Feldman & Vasta walked away with all the loot. 

The ripple-effect should also be considered. Hundreds of people out of work at once can't purchase goods the way they used to; the collapse in Pittsfield was staggering to the local economy: Dry cleaners, clothing stores, furniture shops, gas stations, restaurants - all were impacted. 
Nov 3, 2012 10:57AM

Bain Capital reminds me of lions circling a heard.  They look for sick or weak members of the heard, then attack.  Companies like KB Toys were already dying.  Bain Capital simply finished the job. 


Is this process good for society?  Culling weak companies frees up capital to invest in more profitable ventures.  However, is it right that employees of these weak companies lose their jobs because they happen to work for pooly managed companies?  The same managers who drove these companies into the ground almost always land on their feet after a leveraged buyout. It's their employees who pay the ultimate price.

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