Wednesday, January 18, 2012

Why I Am For "Corporate Raiding," and Why You Should Be Too

Mitt Romney has gotten a lot of flak for being in Bain Capital, a venture capital company that has been described as "vulture capital." Others simply call some of what they do "corporate raiding," which is generally considered to be a bad thing.

But why is it considered to be a bad thing? Let us take a look at what corporate raiders do, paying particular attention to the "seen" and the "unseen."

Before I begin, let us acknowledge that the entire reason Bain Capital does anything is to make money. That is the purpose of business. Thus, it is no argument whatsoever against what it's doing. It is irrelevant as to whether or not what it does is ethical or unethical, whether we should support it or not.

SEEN

When a company like Bain Capital takes over a company, what we typically see is a strong company taking over a weak one, people getting fired, benefits getting cut, etc. Finding someone who doesn't like what a corporate raider does in the aftermath is like finding a fundamentalist Christian in the South: it's nearly impossible not to do it.

UNSEEN

But what social benefits may there be to corporate raiding? Well, let's begin with the fact that a business, in order to be taken over, must be in a weak condition. It is most likely unprofitable, if not actually losing money. Should it continue on in this way, it is likely to go out of business, which would result in the elimination of its product from the market (reducing competition, reducing consumer choice, etc.) and every single employee in the company losing their jobs (and, needless to say, benefits). Often management won't want to do what is necessary to keep the company afloat, whether it be because of nepotism, unwillingness to fire anyone (which is often exacerbated by a variety of laws that allow fired or laid-off workers to sue the company for "discrimination," even when no discrimination has occurred; such lawsuits could bankrupt the company, leading to everyone being laid off), mismanagement, etc. Further, workers are often resistant to reductions in pay and benefits, which puts the company in a difficult position financially. They may need the workers, but can't afford what they are being paid (directly or indirectly, through benefits). Sometimes it takes an outside perspective to make a company profitable once again. That is what companies like Bain Capital do. They come in, assess the situation, take over, and make all the hard decisions. The result is the creation of a newly profitable company that can continue to make its product, and perhaps expand once again in the future. A variety of painful cuts occur, but they are necessary to save the patient.
The characterization of this process as "vulture capital," intended as an insult, is actually an accurate description of what is taking place. Vultures provide a valuable service in the ecosystem. Without them and other carrion-eaters, dead bodies would take longer to break down, with the result that there would be far more disease. As disease spread, more animals would get sick and die, resulting in more rotting corpses, with more disease. Vultures, by eating the corpse, thus helps keep the ecosystem healthy. So, too, corporate raiders. By taking weak companies and making them strong, they actually strengthen the economy. It's not a pretty sight to see, but one has to look at the benefits to the overall system. It is not a sign of virtue to sacrifice the well-being of everyone else with the maintenance of a weak economy with weak growth so a few people can keep this or that particular job or set of benefits.

Companies like Bain Capital thus, through such activities, create value by making underperforming companies (more) profitable. In doing so, they help keep the economy healthy.

I will note, though, that this is not the same thing as a government bailout or takeover. There are a variety of reasons for this. For one, a private company like Bain is going to be concerned with transforming the company to make it more profitable, more efficient, and healthy. If they cannot do so, they break the company up and sell off the parts, to reallocate the capital in the company to more valuable uses. Were a government to do the same thing and take over a company, there would be pressures to keep everyone on and maintain the benefits. Since the government does not have its own money, but instead has a supply of public funds from taxes and borrowing, they further not only have no incentive to make the company lean and competitive, but rather can keep everyone in place and, more, even expand, making the company more bureaucratized. Such companies can lose efficiency, since there are no market pressures on them to be more efficient and wealth-creating. Further, there will be public choice issues, where others within the industry will want to get involved in the company in order to ensure it remains unthreatening to others in the industry. Many people with wealth and power will get more wealth and power, all at public expense. In other words, with a government takeover:

SEEN

Everyone keeps their jobs and benefits.

UNSEEN

The economy is weakened by having a wasteful company in the market, surviving on taxes and borrowing that remove money from the economy and direct it toward the maintenance of such an increasingly wasteful company.
It should then be obvious which one the public will support. But it should also now be obvious which one you should now support.
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