Sunday, January 15, 2012

A Defense of Bain and Private Equity

Mitt Romney, Bain Capital, and private equity firms in general have come under suspicion, criticism and attack for their business practices. Since I have been employed by four different firms that were majority owned by private equity, including a firm owned by Bain Capital, I feel compelled to respond to what I believe is baseless , factually inaccurate and/or disingenuous attacks.

In the mid- 1990's, I was CFO of Stream International. Bain Capital was the majority owner of Stream. Mitt Romney was at Bain at that time. I met him a couple of times and found him to be cordial and informed about our business, even though it wasn't one of the businesses he was directly involved in.

Stream performed manufacturing and services as an outsource provider for a number of the world's great technology firms. Companies like Microsoft, Dell, Novel, Sun, Hewlett Packard, Fujitsu, Palm, IBM, Apple and Compaq. At the peak of the firm, revenue was over $1 billion annually. One of keys to Stream's success was its presence in much of the world. Stream had locations in Australia, Germany, Brazil, Japan, France, the U.K, Taiwan, Ireland, S. Korea, Scotland, Singapore, the Netherlands and of course the U.S. That enabled customers like Microsoft, which was Stream's long-time largest customer, to purchase services around the globe with one phone call (actually an email). Included in our service offering were:
• call centers where we principally performed technical assistance (in dozens of languages),

• translation of technical documents and screens (e.g.- software firms asked us to "take these English computer screens and drop-down menus and give us the Chinese and Brazilian versions"),

• fulfillment for the then fledgling e-commerce business. That is, Stream stored customer inventory in its warehouses, and picked/packed & shipped the merchandise to the end-user customer on behalf of Stream's customer. The end user probably thought that the item they received came from the original business - Stream was invisible in the process.

• wholesale distribution of software licenses. Again in explanation: most larger software companies involved in desktop applications don't deal directly with large corporations; they use middlemen distributors who take a small mark-up and manage distribution as well as the billing of hundreds or thousands of individual accounts,

• In that vein, some very clever software license unlocking and user entitlement programs,

• Printing.

• And light manufacturing and assembly.

With that background, the relevant story is light manufacturing. One of the things Stream "manufactured" was diskettes. If you are under forty, you might not even know what a diskette was. A diskette was a portable storage device, analogous to today's flash drive (you may know them as thumb drives or key-chain drives). While analogous, compared to today's technology, the storage capacity of a diskette was tiny. As software operating systems and applications grew larger, it might require six diskettes, or ten or even more to store. Stream was one of the world's largest manufacturers of diskettes. What that really meant was that Stream purchased the diskette blank, and downloaded the application onto the blanks. Stream had factories in Singapore, in Provo Utah, in Ireland and elsewhere with hundreds of diskette replicators, running around the clock, producing things like all the diskettes to load Windows 95, or WordPerfect, or games and educational software for The Learning Company onto personal computers. Since each country needed its local language version, the factory in Singapore, say, was producing Korean, Japanese and Malaysian diskettes while the Scottish plant was producing French and Dutch versions.

Now to Bain and their role. Members of Bain were on our board. Bain had made a very substantial investment in Stream. I found them to be thoughtful, helpful and very analytical. They were investors for the long-term. As time passed, the demise of diskettes as a storage media was easily predictable. Bain never told us that we should close a diskette production line or close a factory. The market told us that we were going to have to change; diskettes were going to vanish. Like black and white televisions, 78 rpm records, wedges for splitting logs and eight-track players.

We gradually phased out diskette production around the world. We replace diskettes with CDs. But CD replication equipment could be managed with far fewer employees than the diskette replicators required. The production jobs for workers minding and maintaining diskette replicators were gone. They will never come back. Bain didn't tell us to move those jobs off-shore; we had already established factories in other countries to serve those markets locally, not to serve the U.S. market. Bain didn't force us to close those production lines; when demand shifted we had to.
Importantly, Bain didn't strip cash out of the business. We spent millions every year on capital projects to grow the business.

Perhaps if the microprocessor and related software had been developed in some worker's paradise country, diskette replicators would be banging away today, and those workers would have jobs. But at what cost? One could argue that Stream should have provided other jobs for those affected. Doing what? There had to be some new product to make; a new innovation. And where would the money come from?
I remain thankful that all that technology was created and developed in America. I shudder at the thought of what our U.S. economy would be if we hadn't been the first with the Intel microprocessor, the Apple II, the PC, Lotus 1 2 3, WordPerfect, Harvard Graphics and everything that followed - especially the Internet, where U.S. firms continue to be the innovative leaders.

Businesses are established , thrive and fail every day. Bain had nothing to do with the fate of the diskette or the workers that made them. Innovation and the free market did. I found the individuals I worked with from Bain Capital to be smart and honorable businessmen, and would work for them again in a heartbeat.

Sunday, January 08, 2012

SOPA Legislation

I sent the following letter to Senators Hutchinson and Cornyn and Representative Culberson.

Dear Senator:

As a long-time investor in e-commerce and Internet businesses, I want to provide my view on the proposed "SOPA" legislation.

Despite its clever name, this legislation has little to do with preventing copyright and patent infringement, and everything to do with old media companies trying to grab power.

Over the last twenty years America's growth has been powered by enterprises like Microsoft, Intel, Apple, Oracle, Dell, EBay, WebMD, Facebook, Google, EMC, and Twitter. New ones are emerging continuously like Fusion IO Tumbler and Square. What have the movie companies produced? Saw II? Halloween IV?

This is the creative destruction of capitalism and the free markets at its finest. Don't let the declining industries handicap the innovative ones.

Thank you for your consideration.


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Saturday, January 07, 2012

Ethanol Subsidy

In a rare example of good judgment and good policy, Congress let the ethanol tax subsidy expire.     Various estimates place that at about $6 billion.  Not much when the annual hole exceeds $1 trillion, but it is a good place to start.

Monday, January 02, 2012

New York Times

Today's New York Times (Jan. 2, 2012) editorial criticized Republicans for including the Keystone Pipeline in the legislation extending the payroll tax cut. In the Times' view, it isn't environmentally responsible, won't create the estimated number of jobs and delays the move to green energy sources. The urge more time for studying the potential environmental impact.


First, who knows if the number of jobs to be created is exaggerated or not? It doesn't matter - we know that a number of jobs will; they are high-paying jobs, and we need all the jobs we can get. Second, this project has been studied to death. "Study" in this case means "stall" until the proponents give up. But most importantly, their argument employs a false choice. It isn't a choice between a pipeline and anything. We need all the energy we can get to become energy independent. And, if one believes in the electric car, as I do (qualification: like the Tesla; not the boring Volt or the insipid Leaf) then we are going to need a lot more electricity.

Come on NYT: we need that pipeline with its jobs and fuel.

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Sunday, January 01, 2012


Relaxed with a Partagas that had been in my humidor for years.  A corona perhaps?  Too fat for a lonsdale, a little short for a Churchill.  Anyway, nice smoke.  Burned smothly and evenly, tasty and not too strong.

Just what I needed for a little relaxation.

Christmas cards

Just made one more review of all the Christmas cards we received this year.  Perhaps it has something to do with our long-time friends, or that we are all getting older - I don't know.  But clearly we received many more cards this year with an openly Christian religious point of view.

A reaction to political correctness and the banal "Happy Holidays"?