Monday, May 21, 2012

Bain Capital: Gekkos or Pretty Women

Oliver Stone's Wall Street debuted in 1987, starring Michael Douglas as Gordon Gekko, a notorious corporate raider. His modus operandi was to buy up a substantial stake in a vulnerable company, then use the accrued authority to increase share price, often by "downsizing" or even by breaking the company up, then selling off pieces. In one memorable scene, Bud Fox--upset at the prospect of having helped ruin his father's employer--asks Gekko why he want to break up Blue Star Airlines. Gekko's response: "Because it's wreckable, alright!"

That one exchange completely captures the most common public image of people like Gekko (fictional, to be sure), like Michael Milken, like T. Boone Pickens, and like Mitt Romney. They're the bad guys, the ones that put profit above all else. People don't matter when there's money to be made. How could such people ever be anything but villains? Yet, in another famous movie, the corporate raider became the prince, the knight in shining armor.

The movie? Pretty Woman, staring Julie Roberts and Richard Gere which premiered a scant two and a half years later in 1990. In this case, the corporate raider was Edward Lewis--played by Gere--whose life is so consumed with making money that he has little time for much else, including love. Yet, he falls for Vivian--a hooker played by Roberts--and eventually "rescues" her from a life of prostitution. In the course of getting to that point, Lewis' raider mentality also evolves, as he decides to help the latest company he had targeted, rather than breaking it up for profit. Everybody wins, right?

But note two things. First, it is Lewis' wealth--his money--that allows him to play the hero, from the beginning. Despite the emotional trappings of the film, it is clear that Vivian falls for him first and foremost because he is rich, period. And he never renounces that wealth; he doesn't give it all away and get a job in a video rental store or a fast food joint. Second, despite the feel-good nature of Lewis' change of heart with regard to destroying one company, we don't know that the move was wise, at all. We don't know that the company won't go belly-up a year or two down the road. We take it as a given that it's a Good Thing, keeping the company going.

But that's a stupid proposition to accept at face value. Some companies are poorly run and/or poorly organized. Some companies do produce things inefficiently, things that are no longer in demand, or things that just don't return a real profit. What is the sense in keeping such companies afloat indefinitely? None. As Paul Ormerod so excellently noted in his 2007 book, Why Most Things Fail: Evolution, Extinction and Economics:
The tendency to overemphasize successes and to rationalize them ex post is chronically endemic amongst business historians and management consultants. The latter group are particularly prone to the temptation of claiming to have found the unique formula of business success. Books proliferate, and occasionally sell in very large numbers, which claim to have found the rule, or small set of rules, which will guarentee business success. But business is far too complicated, far too difficult an activity to distil into a few simple commands, be it the ‘set price equal to marginal cost’ of economic theory, or some of the more exotic exhortations of the business gurus. It is failure rather than success which is the distinguishing feature of corporate life.
Eventual failure is a given in a free market. It has to be. And it is from failure that people learn how to succeed. More importantly, it is failure that provides the resources for growth, for eventual success. Michael Milken has been roundly vilified for what he did in the seventies and eighties. More often than not, he's called the "junk bond king," which suggests he was mostly engaged in selling worthless paper to gullible investors. And there is little doubt that he engaged in some illegal practices. That said, what Milken also did was open the floodgates for dormant capital, for entrepreneurs seeking that capital, for a wave of wealth creation, admittedly based on the destruction of weak and unsuccessful companies. A good quote from Milken: "There is no shortage of capital; there is only a shortage of management talent."

The truth of this last brings us back to Wall Street. Gekko defends what he and other like him do with his legendary "greed is good" speech, before the shareholders of Teldar Paper:
Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I've been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.
Looking back to the eighties and what transpired through the nineties, can anyone honestly say Milken and Gekko were wrong? The "Dotcom" boom--and others--was made possible because capital was available, thanks to people like them. And companies unable to keep up with changes in the marketplace rightly went the way of dinosaurs. The most significant exceptions were those companies deemed "too big to fail," or the like. And we see now that such exceptions were--and continue to be--costly ones.

The Gekkos of this world--the Bain Capitals--are vital cogs in the engine of capitalism. They are, in fact, what makes capitalism really work. Sure, they can go too far; there have to be rules and oversight. But they're not something that simply can be eliminated with the wave of a hand.

And yes, it's all about money and greed at the end of the day for such people. Yet, those sins are easily forgiven when one is suddenly benefiting personally--like the Roberts character--from them. Even today, people like Bill Gates are lauded for their charitable work, never mind that the monies for such work were a product of ruthless business strategies and practice.

It's easy to call Bain Capital evil. It's much more difficult to admit that such "evil" is needed. Desperately needed, in fact.

Cheers, all.

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