The current debate about the role that Bain Capital has played in job creation becomes even more illustrative when it is considered together with the increasing hue and cry over the Facebook IPO fiasco.
Governor Romney has quite rightly pointed with pride to his record of accomplishment at Bain Capital, where he made a lot of money for himself, his partners and their investors. President Obama has quite rightly pointed out that Bain Capital's leveraged buy-outs often resulted in job losses.
According to Romney's own statements, after their storied - if exaggerated - adventure in office supplies with Staples, Bain Capital shifted their focus from investing in startups to investing in leveraged buy-outs.
In a leveraged buy-out, shareholders are bought out by offering a share price substantially higher than the going rate and, once the share holders have been paid off and the firm becomes privately-held, the private venture partners can then sell off or dismantle the unprofitable parts of the business and eventually sell the remaining fragment of the original firm.
Leveraged buyouts off a significant windfall to the small share holders, but also offer profits of several orders of magnitude higher for the venture partners upon the liquidation and resale of the subject corporation.
The disingenuous part of Romney's statements about Bain Capital is that he continues to portray Bain as a venture capital firm when it made most of its profits from leveraged buy-outs.
The difference is clear. A venture capital firm supports the creation of new businesses by underwriting the development of start-up ventures. Leveraged buy-out specialists do the exact opposite: they take existing corporations and break them down into their component parts, often out-sourcing parts of the business to foreign sub-contractors, a process that always costs jobs while generating profits.
Any defense of Bain Capital's business activities that refers to Bain as a venture capital firm would require a specific statement listing the new ventures Bain has underwritten and the number of jobs that have been generated by those ventures, statistics Bain doesn't have because they don't exist.
The relationship between this analysis of Bain Capital and the Facebook IPO fiasco stems from the fact that the Facebook IPO has been criticized because the share price of the stock has decreased since the initial public offering hit the market.
This approach to the valuation of Facebook stock is a complete reversal of the usual process for determining the value of a new issue, which has always been based upon the projected earnings the company will deliver to its shareholders through stock dividends.
Since we don't know when or how much Facebook is going to pay shareholders, the jury is out on the pricing of the initial public offering as far as its value as an investment in concerned....unless you are solely concerned with the speculative value of the stock.
The Facebook IPO wasn't designed to generate operating capital for the company, which didn't need to issue stock to generate working capital. Instead, it was designed to leverage out the initial venture capital partners....the entities that provided the working capital to develop Facebook to its present level of dominance in its market sector....providing huge personal profits for Zuckerberg the other executives who have been with the firm.
In most IPOs, voting shares are distributed in the process. Facebook chose to distribute non-voting shares, enabling Zuckerberg to maintain his control over the company, while diversifying the ownership of the company through a broad shareholder base.
This does two things: it protect Zuckerberg from being voted out of power by disgruntled shareholders, and protects the company from hostile takeover bids....an almost certain outcome of Facebook's enormous political clout since Zuckerberg, as a liberal, is already a target for conservative interests who lust after his market share.
But the reality of the situation is that the Facebook IPO also protects Facebook, as a company, from leveraged buy-outs initiated by successive generations of management, after Zuckerberg has left the stage, whenever that happen to take place.
The problem with the criticism of the Facebook IPO is that it is based solely upon share price rather than dividend performance, and therefore indicates a Bain outlook on financial management: what can we make off this company if we break it up and sell off the pieces?
We will only know what the real value of Facebook stock is when we see their initial dividends. If they are anything more than 15% of the IPO price, then the shareholders will be well-served by their purchases. Anything less than 5% would raise questions about the initial offering price.
Right now, speculators who were hoping for a quick killing are up in arms because the stock isn't giving them the quick fix that speculator-junkies need to stay happy...but what they are really saying is that they were hoping to drive the share price up to some stellar heights and then sell off their shares to the unwary investors who would never be able to recoup the inflated value of the stock from subsequent dividend disbursements.
So, there's more than meets the eye here....much more.