Wednesday, August 17, 2011

Dade Behring and Mitt Romney: A Complex Saga

The role of GOP candidate Mitt Romney with Dade Behring, a Chicago suburban-based medical diagnostics company, and its Chapter 11 bankruptcy has already been reported. Some say it exemplifies Romney as a job destroyer and company wrecker, while others absolve him of any responsibility and point to the company’s renewed strength after the filing. Having done work for Dade Behring during the late 1990s, I’ve found the facts lie pretty much in between.

A private-equity group led by Romney’s Bain Capital (of which he was a co-founder) and Goldman Sachs purchased Dade International from Baxter International in 1994, paying $450 million, of which only $85 million were their own. In 1997, it merged with a German company, Behring Diagnostics, a spin-off from Hoechst AG (now Aventis). Hoechst, Bain Capital and Goldman Sachs became the major shareholders. Dade Behring eventually became the world’s largest company solely devoted to clinical diagnostics, reaching $1.2 billion in sales and 6,400 employees worldwide by the end of the decade.

Despite the growth and attractive product line, Dade Behring experienced a weakened financial position due to adverse currency-exchange and interest rates and overleverage. According to reports, the company slashed at least 1,000 jobs along with its research and development budget. Still, it made a major transaction in 1999, for which I played a marginal role, that is most controversial.

In the face of  balance-sheet problems, Dade Behring still borrowed to buy a significant block of its equity stake owned by Bain Capital and Goldman Sachs. On May 3, I issued a news release for Dade Behring, working with and getting approval from Joe, Bain Capital’s public relations counsel, announcing the company would repurchase about $400 million of its stock and retire those shares. Bain Capital and Goldman Sachs were paid $365 million, more than four times their initial investment. The transaction, which raised Hoechst’s ownership from 32 percent to 50 percent, helped boost Dade Behring’s debt to $902 million at the end of 1999 from only $373 million one year earlier.

Some interesting dynamics then came into play. I compiled a list of questions the company might get from the media and other audiences. The first one was something to the effect of “Will the company be able to service the added debt comfortably?” I was assured it would. I also asked whether this was undertaken in order to pay the private-equity investors a dividend in light of an adverse IPO and M&A environments. Again, management said it was based on a sound business decision.

Interestingly, Joe and I had identical roles: keep the companies’ names out of the news. One year prior, Bain Capital had acquired a 93 percent stake in Domino’s Pizza. “The number of Bain execs interviewed about the deal?” Joe said. “Zero.” He assured me they wouldn’t talk about this one either. The transaction also elicited a call from a Barron’s reporter who was doing an article on companies that avoid paying dividends to investors (in this case, those other than Bain Capital and Goldman) after reaching a certain ownership threshold. Working with Dade Behring management, I made the case that the company was not required to pay additional dividends because certain covenants weren’t met. The publication came out on Saturday morning and Dade Behring was not included.

As the company’s financial position continued to decline, a creditors’ committee claimed that certain owners, directors and advisors – including Bain Capital and Goldman Sachs – had engaged in “illegal dividends, illegal stock transactions and impairment of capital,” as well as other acts. No legal action resulted after Bain Capital and Goldman Sachs agreed to purchase debt from some of the other lenders.  Still, on August 1, 2002, Dade Behring declared Chapter 11 bankruptcy, suffering under a debt burden of $1.5 billion.

This was a prepackaged bankruptcy, which is much less onerous than going bankrupt sounds. The same team at Kirkland & Ellis that reaped $100 million in fees for handling the United Airlines bankruptcy devised a plan whereby the company’s debt would be swapped for equity and Dade Behring would go public. With the company’s operations basically unaffected, the company emerged only 47 days later as a Nasdaq-traded company. Out from under its debt load and a newfound allegiance to shareholder value, Dade Behring returned to the growth mode, with sales reaching more than $1.7 billion in 2006 and a headcount of 6,000. The following year, Siemens acquired Dade Behring for $77 a share – it had gone public at $10 – with total proceeds of $6.4 billion.

So here’s my view on what this has to do with Mitt Romney. At the time of the massive stock buyback, Romney had left the firm three months previously to head the 2002 Winter Olympics. He told the New York Times in June 2007 he had no role in the transaction that ultimately helped drown the company in debt, although a former Dade CEO is quoted that Romney was much more involved in the portfolio companies than one would expect. Romney told the Times, “It is one thing that if I had a chance to go back I would be more sensitive to. It is always a balance. Great care has got to be taken not to take a dividend or a distribution from a company that puts that company at risk.” Romney said taking a large payment from a company that later failed “would make me sick, sick at heart.” Dade Behring in fact did not “fail,” although Bain Capital’s practice of pulling dividends out of portfolio companies early on in its ownership contributed to other companies going under. In this case, either either poor analysis or the desire for ROI propelled Dade Behring toward bankruptcy. Because Bain Capital and Goldman Sachs employ mainly MBAs from the top schools, I'll bet it was the latter.

My advice to Democrats (the clowns/nuts/fools in the GOP running against Romney can do what they want): forget Dade Behring. Although the story contains the usual greed about fees to the detriment of financial strength, one really can’t make the case for job destruction and the company became very successful in the end. Any of us could have bought Dade Behring stock at $10 and sold it for $77; you didn’t have to be a private-equity heavy. Shareholder value was enhanced after all; too bad Bain Capital had to be a major beneficiary.


  1. Thanks for sharing your insight on this situation. Very even-handed. It is a pity the NY Times did not bother reading this before their most recent article.

  2. Great article. I'm still a bit unclear as to Romney's involvement in the stock buyback though.

    You state that Romney said he had no role, but then state that a CEO said Romney was "more involved in portfolio companies than one would expect." The CEO's comments seem to be very broad and don't seem to deal with Dade specifically, so I'm not sure what to pull from the CEO's comments. Is he speaking of the buyback, and therefore, contradicting Romney's claim that he played no role, or are his (the CEO's)comments broad reaching and not directed to the Dade buyback specifically, making them, therefore, irrelevant in the question of Romney's involvement?