Josh Kosman, a business reporter for the New York Post, got fired from one of his first journalism jobs. It was a position at the Middletown Press, a daily newspaper in central Connecticut then owned by private-equity shop Warburg Pincus. After reading his 280-page book, “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis,” I got the feeling that Kosman decided to get his revenge on the whole buyout market.
I found Kosman’s fly-on-the-wall account of the many transactions described in the book generally well-researched and entertaining. But I didn’t come close to buying into the dire projection of almost half of all buyout-backed companies filing for bankruptcy, or 1.875 million Americans thrown out of work—let alone that the industry would cause the next great credit crisis.
The book’s biggest flaw is a lack of balance. Imagine a book about your life based entirely on your worst moments—starting with those forgotten lines at your second-grade play, and dwelling on every subsequent failure. Imagine every assumption going against you, every enemy given a chance to babble on, every friend ignored.
Very little in “The Buyout of America” actually argues for private equity causing the next great credit crisis. Instead, in chapters titled “Doctoring Customer Service,” “Starving Capital,” “Plunder and Profit,” readers experience the history of the buyout industry as a parade of greedy investors and ruined companies. Buyout firms identify cash-rich target companies; they pile on the debt to pay for their own acquisitions; they slash jobs, customer service, research & development; they siphon as much money out as they can by charging fees and borrowing money for dividends; and then they head for the exits, counting their money, leaving behind broken companies that often land in Chapter 11. (For good measure, they also buy politicians, and hurt unions.)
In places the lack of balance is laughable. In a chapter titled “Lifting Prices,” readers learn how mattress companies Sealy and Simmons get weakened by a series of private-equity owners who allegedly sacrifice quality, raise prices and defer new-product development to lift cash flow in the short term. Their undoing is hastened by Tempur-Pedic, whose more comfortable foam mattresses take market share. By 2007 the company manages to surpass Sealy in enterprise value.
I give Kosman credit for noting that during the mattress wars Tempur-Pedic itself was owned by two private equity firms,
* Lack of Balance: Surely a firm whose investors pay it a premium 30-percent carried interest has had some successful deals. But where are they?
* Thoughtlessness: Why would lenders continue to provide financing for Bain Capital deals if its companies routinely crashed into bankruptcy? Why would institutional investors continue to back its funds? Kosman doesn’t seem to have the time or interest to address these questions.
* Lack of Perspective: How many companies has Bain Capital bought and sold over the years? How much money has it generated through dividend recapitalizations versus through profitable exits. How many of its companies have gone into Chapter 11? How many have done great? You won’t find out reading “The Buyout of America.”
Toward the end of the book, Kosman, lamenting about all the debt weighing down buyout-backed companies, points out how “only two businesses acquired through leveraged buyouts that were not on the Fortune list of the 500 biggest companies when acquired were among the 250 biggest in 2008.” Kosman then contrasts this sorry record with that of venture capitalists, who “can point to many businesses that made the chart, such as Google and the Staples retail chain.” Hmmmm, Staples. Started from scratch in 1986, went on to create more than 57,000 jobs. Wasn’t Staples financed by Bain Capital?
Kosman may or may not know that. Either way, it doesn’t look good.