Quite a statement someone made to me. I must say it is surprising. Do those who rail against profit truly understand what the ramifications would be if you outlawed profit? I think not. The cause of this wild statement and the context is important, see here.
Mitt Romney's political foes are stepping up attacks based on his time running investment firm Bain Capital, tagging him with making a fortune from the rougher side of American capitalism—even as Mr. Romney says his Bain tenure shows he knows how to build businesses.
After reading about Romney’s work at Bain Capital they remarked:
Someone acquires your business without your approval, sells some assets, fires your key employees, then uses the company to pay off his debt from current receipts, when profits decline, he sells the rest of the assets, lays off the workers and liquidates the company, walking away with the cash. Profit when it's first, last and always is horrifying.
Let’s start with what happens in the real world. What kind of companies did Bain Capital pick? Do they try to buyout companies that are making good consistent profits or distressed companies?
Asked in an interview about Bain's bankruptcy and failure rate, Mr. Romney said that in buyout deals, "our orientation was by and large to acquire businesses that were out of favor and in some cases in trouble." He added that Bain wasn't the type of firm that stripped companies and fired workers, but instead, "our approach was to try to build a business. We were not always successful."
They pick companies with troubles, distressed in some fashion of course. The owners and prospective buyers can see the trouble. Do they wait for the company to die and fire all the workers and sell everything off at a discount? Someone like Bain comes along and offers money to the owners. Enticing enough to be more than going out of business but still possibly a premium at today’s price. Even in a successful hostile takeover a majority of shareholders sell out their shares to give the buyers control of the company. A voluntary transaction even when they do intend to strip the company and sell things off..
Now the work begins. Reconfigure things, sell parts off and close down still others until the buyers are left with what they hope to be a profitable entity. Of course, many of us have been subject to a companies purchase. Ever sat at the same desk during 2 years and worked for 3 companies? Many workers leave rather than wait for the turnaround, some get fired in cost cutting and the rest stay. In Bain Capital’s case, the article finds that just under 13% of the companies they studied provided around 70% of the returns.
Sounds to me like they were sort of successful. Their goal was not to save jobs but was a byproduct. For those companies to make returns they were looking at ways to reduce costs and boost sales. Successful companies retain employees and tend to hire more. Can we quantify how many jobs may have been saved, probably not and only with a lot of investigation. Where did the assets they sold end up? Another company purchased them. Most probably used the asset or maybe demolished a building to use the land differently. They may or may not have hired some new workers to work there or operate the new asset. How far down the chain of asset ownership do you want to follow the job creation?
Yes, people got fired. Before they intervened everybody may have been fired anyway. Many were likely rehired at other companies elsewhere. All told it is merely a change. Change is painful. Change is also inevitable. Profit is hardly horrifying. Failing to act to save a company or buy the assets is more compassionate?
With no opportunity for profit Bain wouldn’t exist. There would be no reason to risk your assets in the first place. Large companies would be very difficult due to a lack of credit on that level. Why would a bank risk anything to make a loan? Nothing is there to be gained? Investment? You can only lose it. If you really think about what profit causes to happen there is more good than bad.
