Saturday, May 19, 2012

The Cheap Attack Ads on Bain Capital's GST Steel Investment Decison

President Obama's campaign has attacked Mitt Romney for investing in a loss making Kansas City steel company.

The underlying logic behind the attack ad seems to be that since the eight year long Bain Capital investment was unsuccessful and people eventually lost their jobs, capitalism in general, and Bain in particular, are at fault for making that investment. And therefore that makes Mitt Romney someone unfit to be our nation's president.

If that's the case, it's nuts, of course, but that definitely appears to be the attack ad's message to voters.

I know politics sucks and that it's dirty, so the cheap attack ad doesn't surprise me. Not in the least.

What does surprise me, however, is that Democratic strategists evidently believe that the majority of Americans will align with this assault on free market private sector capitalism.

If as a people we've really come that far down the anti-free market road to socialism and big brother government, we're more like the Europeans that I thought possible. And if that's the case, my fellow Americans, the prospects for a prosperous and healthy future for America are dim indeed.

Vampire Capitalism? Please is subtitled 'GST Steel would have failed much earlier without Bain.' We'll quote the well researched editorial in total:

"This week the Obama campaign debuted its attack on Bain Capital, the private-equity firm Mitt Romney founded. Its two-minute ad purports to tell the story of GS Technologies, a Kansas City-based Bain investment that went bankrupt in 2001.
To hear the Obama campaign, this is a tale of greed: GST was a healthy, happy, quality steelmaker until Bain plundered its worth and stripped its 750 workers of their due. "It was like a vampire," laments one former employee in the ad. "They came in and sucked the life out of us."

GST is a tragic tale, though in a different way. The real story of GST is that of a private-equity firm trying to spark some life into a uncompetitive, over-unionized industry. Bain's crime here—if that's what you call it—was giving a dying steel plant an unexpected eight-year lease on life.

When Bain bought the Kansas City mill in 1993, steel was a scene of carnage. Global players were pouring out cheap products, and America's high-cost steel plants couldn't compete. The industry had lost 200,000 jobs in preceding years. In 1992 alone, the six largest U.S. steel mills had lost a combined $3 billion. Armco, the company Bain would buy the plant from, would lose $641 million in 1993.

The Kansas City plant was itself dying. At its 1970 height it employed 4,500; by the late 1980s it was down to 1,000. A year before acquisition, Armco had laid off another 75. Its equipment was old; it faced fierce competition at home and abroad.

B.C. Huselton, a vice president of the business at the time, tells me that in 1990 the Armco CEO held a meeting. "He told us, 'Look, we either try to sell it, or we've got to shut it down.'" Armco had shut down another Kansas City facility, Union Wire Rope, only a few years before.

The Kansas City plant had two product lines—high-carbon rods and grinding media (used in mining)—that it felt could give it a competitive edge. But it needed investment, and Armco was tapped out. Bain nonetheless saw some potential and in 1993 joined other investors to acquire it for $80 million. Management renamed it GS Technologies (which would become part of a larger GS Industries) and poured an additional $100 million into modernization.

The strategy worked for a time. The market firmed up and GSI became a U.S. leader in steel rods. In 1994 it felt confident enough to distribute a dividend to investors. In both 1996 and 1997, GSI would realize $1 billion in revenue.

And then came the tsunami. The late 1990s saw a new outpouring of cheap steel from elsewhere around the globe. The Asian financial crisis walloped the mining industry, cutting demand for GST products. The price of GST's electricity and natural gas skyrocketed. The union dug in, refusing to make concessions. By April 1997, it was on strike, shooting bottle rockets at guards. Labor costs spiked, and by 1999 GSI was reporting $53 million in net losses.

In 2001 it would become one of 31 steel companies that went bankrupt from 1993 to 2003. (Mr. Romney left Bain in 1999.) The steel crash was the economic drama du jour, with Congress railing about "dumping."

At the time, GST's union blamed the company's bankruptcy on the political class, for failing to hamstring imports. "We can't compete against the steel imports that are being sold under cost," said the president of GST's union in 2001. "Our pleas fell on deaf ears in the political arena." The Bush administration would ultimately slap on giant tariffs.

The bankruptcies were led by unionized companies that, like airlines and textiles and Detroit, had negotiated pay and benefits that helped drive their employers under. GST's pension benefits would get passed on to the federal Pension Benefit Guaranty Corp., which in 2002 received $7.5 billion in claims from the steel industry alone. The PBGC covered GST's basic pension payouts.

The Obama ad doesn't note that the broader company, GS Industries, employed 3,500 and that the Kansas City plant (with 750 workers) was the only one shuttered. Other plants were bought and operate today. Nor does it mention Bain's other steel investment in the early 1990s, in an Indiana start-up called Steel Dynamics. The firm touts innovative technology and a nonunion workforce. It today reports $6.3 billion in revenue—25 times what it claimed in its 1996 IPO—and employs 6,000.

A private-equity firm looking to quickly strip value from a company—to "suck" the life out of it—does not do so by investing $100 million in modernization and holding on for eight years, through bankruptcy. Bain has surely made its share of mistakes, and one may well have been trying to resuscitate a traditional steel firm in the grip of industry upheaval. The irony, says Mr. Huselton, is that this plant "wouldn't even be in today's news, if it hadn't been the opportunity that came with Bain. Those jobs would have been gone in 1993."

That's a more revealing story—of the pressures of a global market, the dangers of an inflexible workforce, and the opportunities that come with private equity and risk-taking. It's just not one Team Obama wants to tell."

Summing Up

Free markets are tough.  Competition is often brutal. And global, too. And so it is with steel companies. Especially unionized steel companies.

Investors don't invest to lose money, but they do just that from time to time. When their long term failure is assured, it's time to exit and stop the losses for the shareholders.

As private sector participants, investors don't have the power to tax as do our "kind and caring" public servants. To investors, it's strictly MOM. To the progressive politicians, it's strictly OPM.

The Obama attack ad is all about OPM. Union leaders, workers who lost their jobs and others all go on camera in an effort to tear down the American free enterprise system by waging war against Mitt Romney.

If We the People can't see through this stuff, our country is in trouble.

Without risk takers investing in the private sector and creating wealth, our future as a (1) world leader and our (2) nation's security are in serious jeopardy. You simply can't have one without the other.

Now those are scary thoughts. But even scarier is the obvious reasoning behind why the Democratic  campaign team would even run such an ad.

To me the mere running of the ad reveals that the Obama administration believes the majority of the American people will agree with its message.

And if a large number of We the People do in fact choose to believe this nonsensical story, we will demonstrate that we have zero clue as to what made America the greatest nation on earth and what's required to keep it that way.

That's my take.

Thanks. Bob.