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Romney kept reins, bargained hard on severance

By Beth Healy and Michael Kranish
Globe Staff / July 20, 2012
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Shortly after Mitt Romney took a leave of absence from Bain Capital to run the Olympics in February 1999, he made a trip to Palm Beach, Fla. The firm Romney founded was meeting to celebrate its 15th anniversary as well as the men he had helped make extraordinarily wealthy.

Romney and his partners had decided that, in his absence, five managing directors would oversee the company. And in Palm Beach it became clearer that Romney was unlikely to return — but would retain his title as chief executive officer and sole shareholder.

The Palm Beach meeting, which has not been previously reported, demonstrates the duality of Romney’s role as he parted ways with Bain, an issue that has sparked controversy in his presidential campaign. Romney has said in financial disclosure statements that he “was not involved in the operations of any Bain Capital entity in any way” after Feb. 11, 1999. But he was still legally the CEO, with numerous duties and obligations that were his alone, until early 2002.

Interviews with a half-dozen of Romney’s former partners and associates, as well as public records, show that he was not merely an absentee owner during this period. He signed dozens of company documents, including filings with regulators on a vast array of Bain’s investment entities. And he drove the complex negotiations over his own large severance package, a deal that was critical to the firm’s future without him, according to his former associates.

Indeed, by remaining CEO and sole shareholder, Romney held on to his leverage in the talks that resulted in his generous 10-year retirement package, according to former associates.

“The elephant in the room was not whether Mitt was involved in investment decisions but Mitt’s retention of control of the firm and therefore his ability to extract a huge economic benefit by delaying his giving up of that control,” said one former associate, who, like some other Romney associates, spoke only on condition of anonymity because they were not authorized to speak for the company.

Romney had a lot at stake because Bain had become hugely valuable under his leadership. Romney established Bain Capital in 1984, and in the 15 years that followed, the company had invested $260 million in its 10 largest deals (out of more than 100 during that period) and had reaped a nearly $3 billion return.

On one deal alone, involving an Italian phone directory company, Bain had invested $51 million and reaped more than $1 billion, with Romney’s personal profit being as much as $40 million, according to a former partner. Bain’s funds nearly doubled investors’ money annually during Romney’s tenure.

Romney had expected to remain at Bain Capital for years. He initially rejected the idea of running the Olympics, recounting in his memoir, “Turnaround,” that “after fifteen years of effort, Bain Capital had become extraordinarily lucrative. How could I walk away from the golden goose, especially now that it was laying even more golden eggs?” To do so, Romney wrote, meant “I would walk away from my leadership at Bain Capital at the height of its profitability.”

Before he left, tasks were doled out to other partners, including work on an investment committee and a compensation committee. He was not a partner in the new private equity funds launched in 2000 and 2001, meaning he had no role in assessing new investments, his partners said — a departure from his having previously had the final say on every deal. He initially kept his corner office at the firm’s Copley Square headquarters, which was eventually turned into a conference room. His secretary moved into Bain’s human resources department.

But Romney still had a lot of money on the table; much of his personal wealth was tied up in Bain. And he was still technically in charge.

James Cox, a professor of corporate and securities law at Duke University, said Bain’s continued reference to Romney as CEO and sole shareholder indicated that Romney was still the final authority. Moreover, Cox said, Romney would likely have been updated regularly about Bain Capital’s profits while he was negotiating his severance package. As a result, Cox said, Romney’s statement that he had no involvement with “any Bain Capital entity” appears “inconsistent” with his actions.

“If he is 100 percent owner, I just find it incredible that what I would call ‘big decisions’ — acquisitions, restructuring, changes in business policy — that they would not have passed on to him on an informational basis, not asking for formal approval but just keeping him in the loop,” Cox said.

Romney campaign spokesman Matt McDonald said via e-mail that Romney was not involved in investment decisions after February 1999. Referring to the subsequent period, in which Romney remained CEO and sole shareholder, McDonald said, “Because of the suddenness of the departure and the challenge of fixing the Olympics, it took some time to transfer his ownership to the other partners, which is not surprising given the growth and success of the firm.”

Steve Pagliuca, a managing director of Bain Capital, said, “Bain Capital’s operations were run by a management committee, composed of five of the firm’s 14 remaining active partners, after Mitt Romney left for Salt Lake in February 1999.”

Last week on CBS News, Romney sought to draw the distinction between his owning the company and managing it. “I was the owner of an entity which was a management entity. That entity was one which I had ownership of until the time of the retirement program was put in place.” He said he had no responsibility after February 1999 for management or ownership of the firm, but then, correcting himself, said, “management, rather, of Bain Capital.”

Romney apparently was trying to shield himself from charges by President Obama’s campaign that he had authority, tacit or otherwise, over Bain investments in companies that shipped jobs overseas. That is an argument being litigated over the course of the campaign, and comes while Romney has declined to release relevant tax returns and meeting minutes that might shed more light on the matter.

At Bain, there would be significant upheaval in the immediate months following Romney’s departure in 1999. At least one partner worried that, in losing the founder — one who excelled at bringing in investors, not at finding the companies to invest in and overhaul — Bain might have trouble attracting money to its funds. Bain, which specialized in leveraged buyouts, raised money from investors, bought and sometimes restructured a company, paid itself fees for managing that company, and in many cases, profited from the eventual sale of such companies.

“The ability to raise money without him was untested and that was a concern,” said one former Romney associate from the time. “Mitt leaves; now who is in charge?”

Investors such as Tas Parafestas of The Bollard Group, LLC, a private firm in Boston that has placed client money in Bain funds, paid special attention to the Bain organization during this first effort to raise money without Romney in 2000. It was the firm’s seventh fund, and the prior six all had Romney at the helm.

“I would view it as a major transition,’’ Parafestas said. “Bain had been Mitt’s shop, and all these guys worked with Mitt. Mitt had left, and these guys were raising Fund VII.” But in the end, they had little trouble raising the $2.5 billion fund; some investors received smaller slices than they had requested. “They persuaded people to invest with them,’’ Parafestas said.

Several Bain executives left to start their own firms, rather than go through the limbo transition. Among them were Geoffrey Rehnert and Marc Wolpow, who started Audax Group, a private equity firm; and David Dominik who started Golden Gate Capital on the West Coast.

Amid the anxiety, one Sunday afternoon, Romney and his longtime Bain partner Bob Gay, a fellow Mormon, knelt on the floor together. “We were facing a crucial event that threatened the very existence [of] our firm’s partnership,” Gay later said in a speech that reflected on his time at the company.

Romney’s exit dragged on, officials of the firm said, because it was a complex ordeal to extract Romney from dozens of partnerships and business entities of the firm, along with the negotiations over his compensation. The full tally of Romney’s 10-year compensation deal is not known because he has refused to release tax returns for the relevant period, which ended in 2009. In addition, his financial disclosures are sporadic and incomplete, and his assets are in a blind trust. Romney has released his 2010 tax returns and has said the only other release will be for 2011.

Edward Conard, a former Bain Capital partner, provided perhaps the freshest insight last week in an MSNBC interview about Romney’s negotiations during this period. (Conard declined an interview request.)

“He’d created a lot of franchise value, and we were going to pay him for that,” Conard said. “We had a very complicated set of negotiations that took us about two years for us to unwind. During that time a management committee ran the firm, and we could hardly get Mitt to come back to negotiate the terms of his departure because he was working so hard on the Olympics.” Conard said Romney’s negotiating position was along these lines: “I created an incredibly valuable firm that’s making all you guys rich. You owe me.’ That’s the negotiation.”

While Romney continued negotiating the terms of the severance deal, he referred to himself as CEO. In July 1999, five months after he had left for Utah, he provided a quote for a press release issued by Rehnert and Wolpow, who had left Bain to start their own firm, Audax. He was referred to as “Bain Capital CEO W. Mitt Romney, currently on a part-time leave of absence.”

In that release, Romney said of the departing partners, “While we will miss them, we wish them well and look forward to working with them as they build their firm.”

Those did not sound like the words of someone who had severed his ties to Bain Capital. To the contrary, it implied that Romney was still a part of Bain and its future. Two and a half years after leaving to run the Olympics, Romney finally signed his severance agreement in August 2001. Still, Romney’s name continued to appear as CEO and owner on dozens of Bain fund documents filed with the Securities and Exchange Commission until January 2002. No one would succeed Romney as CEO of Bain Capital. To this day, Bain is run by a management committee.

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