Romney and Staples

On October 31, 2012 there was a Boston Globe article that said – In documents obtained from Tom Stemberg’s 1991 divorce case it was found that Stemberg met Romney in 1985, introduced by a partner from another local investment firm, Bessemer Venture Partners. In early 1987 Mitt Romney was walking the aisles of Staples, a little-known retail store his firm had bet $1.5 million on so far, and picking up office supplies; he waited in line at the checkout counter for far too long and he was angry. Bain and Bessemer wanted to be the lead investors. Then came the negotiations and they were brutal. Stemberg and his lawyer were driving a tough bargain, trying to keep “a very large portion” of the company for the founder while Bain and the other investors were “of course thinking we should take a large portion of the company.” The problems continued into late 1987 and Romney was pessimistic about the company’s prospects. Bain’s goal was to make 10 times its money in 5 years in venture deals, he said, or about 58% a year; he felt there was a 25% chance Staples would be successful, 25% that it would be an “OK investment,” another 25% probability it would be a “bad investment but we’d get our money back” and a “25% probability we’d lose money.” Fearing Staples could fail Romney put less Bain money on the line in the third round of fund-raising and helped put a value on the company’s private stock at $2.90 a share (an amount Stemberg’s ex-wife would later argue was too low). Romney remained a skeptic about Staples’ prospects for a long time, according to his testimony, maintaining that many start-ups fail, and reeling off cold statistics that betrayed no illusions about Staples’ chances. “It was very clearly our intent to [reward] Tom handsomely if the company did spectacularly well. On the other hand, we did not want Tom to receive any reward if he were to turn out to be not an effective chief executive officer,” Romney said in his testimony. Stemberg, who is now a professional investor himself at the venture capital firm Highland Capital Partners declined to comment on the testimony from his divorce case but did not dispute that the Staples negotiations were intense. By April 1989 Staples went public at $19 a share and jumped to $22.50 in the first day of trading. The company’s value soared to more than $200 million and Bain ultimately made $13 million on its investment. “We were obviously proved wrong ultimately but the price we thought was high at that stage given the company’s performance’’ Romney said. It was a small sum compared with the massive profits Bain was starting to reap in leveraged buyouts. But it would be one of the few successful start-ups Romney could claim to have worked closely on. Today, Staples is the world’s largest office supply company, with more than 1,870 stores, 88,000 employees, and a market capitalization of $7.8 billion. Bain no longer has a stake in the company but Staples has remained a centerpiece of Romney’s campaign narrative about understanding small business.

What should we take from this? Stemberg made Staples work, not Bain Capital as Romney admits he was wrong about their potential. This coupled with his real performance in Massachusetts and the fact that he doesn’t handle his own money should give Americans a clue that he has more of an understanding of leveraged buyouts than business.