The business career of Mitt Romney began shortly after he finished graduate school in 1975. At that time, Romney entered the management consulting industry, and in 1977 secured a position at Bain & Company. Later serving as its chief executive officer, he helped bring the company out of financial crisis. In 1984, he co-founded and led the spin-off Bain Capital, a private equity investment firm that became highly profitable and one of the largest such firms in the nation. The fortune he earned from his business career is estimated at $190–250 million.
Entry into management consulting at Boston Consulting Group: 1975–1977 After he received a joint Juris Doctor and Master of Business Administration from Harvard University in 1975, Mitt Romney was recruited by several firms and chose to remain in Massachusetts to work for Boston Consulting Group (BCG), reasoning that working as a management consultant to a variety of companies would better prepare him for a future position as a chief executive.Michael Kranish, Scott Helman The Real Romney, page 97 (HarperCollins 2012). He was part of a 1970s wave of top graduates who chose to go into consulting rather than join a major company directly.
Romney's legal and business education proved useful in his job, where he applied BCG principles such as the growth-share matrix to assist large corporations in deciding how to allocate cash among their business units. Romney worked nights and weekends, and traveled frequently in the U.S. and to Europe on business.Sacha Pfieffer. "Romney's Harvard classmates recall his quick mind, positive attitude", The Boston Globe (June 26, 2007).
Management consulting at Bain & Company: 1977–1984
In 1977, he was hired by Bain & Company, a management consulting firm in Boston that had been formed a few years earlier by Bill Bain and other former BCG employees.Hugh Hewitt. A Mormon in the White House?: 10 Things Every Conservative Should Know About Mitt Romney, pp. 48–49 (Regnery Publishing 2007). Bain would later say of the thirty-year-old Romney, "He had the appearance of confidence of a guy who was maybe ten years older." Unlike other consulting firms, which issued recommendations and then left, Bain & Company had a practice, that Romney learned, of immersing itself in a client's business and working with them until changes were implemented.
Geoffrey Rehnert, who also worked at Bain & Company, "Geoffrey S. Rehnert J.D.", Bloomberg Businessweek (Accessed August 29, 2012). recalls that those who gravitated to Bain were mostly not from wealthy backgrounds. The company operated as a results-oriented meritocracy, and Romney excelled there. He became a vice-president of the firm in 1978, and worked with clients such as the Monsanto Company, Outboard Marine Corporation, Burlington Industries, and Corning Incorporated. Within a few years, he was considered one of their best consultants and at times sought by clients over more senior partners.
Romney aspired to start a new business, and in 1983, Bill Bain offered him the chance to head a new venture that would buy into companies, have them benefit from Bain consulting techniques, and allow the venture's partners to reap higher rewards than consulting fees. He initially refrained from accepting the offer, and Bain re-arranged the terms in a complicated partnership structure so that there was no financial or professional risk to Romney. Thus, in 1984, Romney left Bain & Company to co-found the spin-off private equity investment firm, Bain Capital.
Private equity at Bain Capital: 1984–1990 Bain Capital was founded in 1984 by Bain & Company partners Mitt Romney, T. Coleman Andrews III, and Eric Kriss. In addition to the three founding partners, the early team included Geoffrey S. Rehnert and others from Bain & Company.Bain & Company Profile. Funding Universe, 2000 Romney initially had the titles of president and managing general partner (or managing partner). He later was referred to as managing director or CEO as well. He was also the sole shareholder of the firm.Romney, Turnaround, pp. 15–16. At the beginning, the firm had fewer than ten employees. When new employees were hired, they were generally in their twenties and top-ranked graduates from Stanford University or Harvard University, both of which Romney had attended.Michael Kranish, Scott Helman The Real Romney, page 134 (HarperCollins 2012).
In the face of skepticism from potential investors, Romney and his partners spent a year raising the $37 million in funds needed to start the new operation. Early investors also included members of elite Salvadoran families who fled the country's civil war. They and other wealthy Latin Americans invested $9 million primarily through offshore companies registered in Panama.
While Bain Capital was founded by Bain executives, the firm was not an affiliate or a division of Bain & Company but rather a completely separate company. Initially, the two firms shared the same offices – in an office tower at Copley Place in BostonMichael Kranish, Scott Helman The Real Romney, page 133 (HarperCollins 2012). – and a similar approach to improving business operations. However, the two firms had put in place certain protections to avoid sharing information between the two companies and the Bain & Company executives had the ability to veto investments that posed potential conflicts of interest.Big Consultants Woo Employees by Offering a Piece of the Action. New York Times, October 22, 1999 Bain Capital also provided an investment opportunity for partners of Bain & Company. Bain Capital's original $37 million fund was raised entirely from private individuals in mid-1984. The firm initially gave a cut of its profits to Bain & Company, but Romney later persuaded Bill Bain to give that up.
The Bain Capital team was initially reluctant to invest its capital. By 1985, things were going poorly enough that Romney considered closing the operation, returning investors' money back to them, and having the partners go back to their old positions.Michael Kranish, Scott Helman The Real Romney, page 138 (HarperCollins 2012). The partners saw weak spots in so many potential deals that by 1986, very few had been done. At first, Bain Capital focused on venture capital opportunities. One of Bain's earliest and most notable venture investments was in Staples, Inc., the office supply retailer. In 1986, Bain provided $4.5 million to two supermarket executives, Leo Kahn and Thomas G. Stemberg, to open an office supply supermarket in Brighton, Massachusetts."Growth in Office-Supply 'Supermarkets' Threatens Tough War for Market Share". The Wall Street Journal, December 1, 1988 The fast-growing retail chain went public in 1989; by 1996, the company had grown to over 1,100 stores,Staples Inc. Company Profile. Funding Universe, 2002 and by 2008, over 2,000 stores. Bain Capital eventually reaped a nearly sevenfold return on its investment, and Romney sat on the Staples board of directors for over a decade. Another very successful investment occurred in 1986 when $1 million was invested in medical equipment maker Calumet Coach, which eventually returned $34 million. A few years later, Bain Capital made an investment in the technology research outfit the Gartner Group, which ended up returning a 16-fold gain.
Bain invested the $37 million of capital in its first fund in twenty companies and by 1989 was generating an annualized return in excess of 50 percent. By the end of the decade, Bain's second fund, raised in 1987 had deployed $106 million into 13 investments.Counselor To The King. New York Times, September 24, 1989 As the firm began organizing around funds, each such fund was run by a specific general partnership – that included all Bain Capital executives as well as others – which in turn was controlled by Bain Capital Inc., the management company that Romney had full ownership control of. As CEO, Romney had the final approval say on every deal made.
In 1987, former Herman's World of Sporting Goods CEO Jack Smith made a pitch to Romney, and Bain joined several other backers to help Smith open nine sporting-goods mega stores. Kmart bought the Sports Authority chain for $75 million.
Romney discovered few investment opportunities himself (and those that he did, often failed to make money for the firm). Instead, he focused on analyzing the merits of possible deals that others brought forward and on recruiting investors to participate in them once approved.Michael Kranish, Scott Helman The Real Romney, pp. 141 and 145 (HarperCollins 2012). The firm initially gave a cut of its profits to Bain & Company, but Romney persuaded Bain to give that up. Within Bain Capital, Romney spread profits from deals widely within the firm to keep people motivated, often keeping less than ten percent for himself. Viewed as a fair manager, he received considerable loyalty from the firm's members. Romney's wary instincts were still in force at times, and he was generally data-driven and averse to risk.
He wanted to drop a Bain Capital hedge fund that initially lost money, but other partners prevailed and it eventually gained billions. Romney was on the board of directors of Damon Corporation, a medical testing company later found guilty of defrauding the government; Bain Capital tripled its investment before selling off the company, and the fraud was discovered by the new owners (Romney was never implicated). In some cases, Romney had little involvement with a company once acquired. Beginning in 1989, the firm, which began as a venture capital source investing in start-up companies, adjusted its strategy to focus on leveraged buyouts and growth capital investments in more mature companies."Venture-Capital Funds Grow Larger and Larger – But Start-Up Companies Find They're Still Left Out in the Cold". The Wall Street Journal, September 7, 1989 Their model was to buy existing firms with money mostly borrowed against their assets, partner with existing management to apply Bain methodology to their operations (rather than the hostile takeovers practiced in other leverage buyout scenarios), and sell them off in a few years. Existing CEOs were offered large equity stakes in the process, owing to Bain Capital's belief in the emerging agency theory that CEOs should be bound to maximizing shareholder value rather than other goals. By the end of 1990, Bain had raised $175 million of capital and financed 35 companies with combined revenues of $3.5 billion.Bain Names Chief Executive And Begins a Reorganization. New York Times, January 30, 1991
Temporary return to Bain & Company: 1991–1992 In 1990, Romney was asked to return to Bain & Company, which was facing financial collapse. He was announced as its new CEO in January 1991 but drew only a symbolic salary of one dollar (he remained managing general partner of Bain Capital during this time). His turnaround of Bain & Company has been identified as a primary example of Romney's turnaround talents from the business world, and Romney says there was no upside for him personally: "There was no particular reason to do it other than a sense of obligation and duty to an organization that had done great things for me and which employed a thousand people."Hugh Hewitt. A Mormon in the White House?: 10 Things Every Conservative Should Know About Mitt Romney, pp. 48–58 (Regnery Publishing 2007). However, once Romney took up the challenge, his stake in success became enormous, and his reputation would have been diminished if Bain & Company went bankrupt. He proceeded to apply the "Bain way" to Bain & Company itself.