A business model

To many people, knowing that Mitt Romney made a lot of money with Bain Capital is all they really need to know.  That means he must have done something that benefited the economy, the nation at large.  But that is only because they do not understand the business model of private equity firms.

So for the benefit of those people, I am going to publish a little history lesson, an object lesson that illustrates very clearly what role private equity plays in the world of business.

Mervyns was founded in 1949 by Mervin G Morris.  At it's peak it employed 30,000 people and had 257 stores.  It was acquired in 1978 by Dayton Hudson (now Target) and sold to the private equity firms Cerberus Capital Management, Sun Capital Partners, and Lubert-Adler in 2004.

At the time of the sale, the Mervyns stores were starting to show their age, Dayton-Hudson had been more interested in growing their Target brand than Mervyns.  But the business was still profitable.  It would have taken some work, but it was nowhere near a lost cause.

What happened?  The short version (the long version is a little more complicated but functionally the same), they sold off the real estate and the stores were compelled to lease it back at double the cost.  They sucked out $400 million in cash for themselves and left the company with $800 million in debt.  That was more than the company could survive.

The company was driven into bankruptcy, and 30,000 people lost their jobs.  But it was successful investment because the money borrowed to buy the company was debt to Mervyns, not to the private equity partners.  They got their money, everyone else got screwed.

This is the sort of capitalism that Mitt Romney represents.  It is the sort of capitalism that those who fund the tea party represent.  Yes, it really is legal.  But does this help or hurt anyone except the very few?  It is legal, but is it moral?  Is this really the sort of nation that we want to be?