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A 28-minute anti-Mitt Romney video uses clips of adorable singing puppets and a scared child's face to drive home a point: Romney's Bain Capital drove KB Toys into staggering debt and bankruptcy.
But is that the whole story?
The video, produced by pro-Newt Gingrich super PAC Winning Our Future, seeks to paint Romney as a "predatory corporate raider" who "looked for businesses he could pick apart."
It highlighted four examples, including mall toy store chain KB Toys, from the more than 100 companies that Bain invested in over the years Romney led the private equity firm.
About eight minutes into the documentary-style piece, the video uses an old jingle from KB Toys along with this narration:
"Romney and Bain bought the 80-year-old company in 2000, loaded KB Toys with millions in debt, then used the money to repurchase Bain stock. The debt was too staggering. By 2004, 365 stores had closed."
That the chain failed isn't in dispute: KB Toys went into bankruptcy in 2004 under Bain, later dissolving in bankruptcy court under different owners in 2008. But what drove it out of business?
The first two words in that quote, "Romney and Bain," raise the first question: How was Romney involved with Bain in 2000?
He had retired from the firm in February 1999 to help organize the Salt Lake City Winter Olympics.
Charlyn Lusk, who does public relations for Bain, pointed to a fact-check this week by Fortune that said, "Romney left Bain in 1999 and had no operational role thereafter. It is true that he remained an investor, but so did dozens of university endowments, private foundations and pension systems. None of them played a part in Bain's investment decisions or portfolio company management."
But a New York Times report from December 2011 explains he had something more than investor status — he got a share of corporate buyout and investment profits "enjoyed by partners from all Bain deals through February 2009. ... He was also given the right to invest his own money alongside his former partners."
A Bain partnership bought KB Toys in 2000, putting up $18 million and borrowing the rest, $302 million, the Times reported. Less than a year and a half later, KB Toys borrowed more to pay Bain and its investors — which would have included Romney — an $85 million dividend. (That dividend was part of a $121 million stock redemption, funded in part by $66 million in bank loans, Bloomberg reported based on other news coverage.) Bain partners made a 370 percent return, but left the company heavily in debt.
Did Romney lead the decision to buy KB Toys, and to reap a dividend? That's what the wording "Romney and Bain bought ..." suggests. That's highly unlikely, since he no longer led the firm. Still, he would have benefited from any deal that benefited the partners.
'The debt was too staggering'
The video uses an old ad from KB Toys to paint a rosy picture. Puppets sing about a place with all the "hottest toys." ("Hot we got at KB Toys!") The ad uses a logo with the old "Kay-Bee" name, abandoned by the company in 1981. Viewers are left to think that "staggering debt" drove a merry, healthy company into ruin.
Toy industry analysts paint a different picture. KB's model worked in the 1980s. But those puppets would have been crying by the late 1990s.
"KB was for many years in a precarious position because of where it was in the industry. It wasn't able to compete on price," said Sean McGowan a senior leisure and lifestyle analyst for Needham & Co. "... If you layer on financial strain, that could push it to the breaking point."
The financial strain helped lead to the bankruptcy filing.
But even with no debt, it would have been losing money, said Jim Silver, editor-in-chief of Time to Play magazine.
"Their business model was obsolete," he said. "The world had changed. KB had not changed."
Small mall toy stores, such as KB's, couldn't carry enough inventory — or stay tidy. But mall rents were high, and leases long, limiting KB's ability to shift to compete with its larger rivals. Meanwhile, Target, Walmart and Toys "R" Us could carry far more toys and heavily discount the hottest merchandise.
KB's strategy at the time of the bankruptcy had been selling closeout toys at a discount — read: stuff that was no longer popular — and offering a few hot items at regular prices.
"Knowing all these facts, why is the consumer going to go in there? Is it the higher prices or the old toys?" Silver said.
KB wasn't the only toy store chain struggling. Time to Play made a list of 100 retailers around in the mid 1980s that no longer exist, Silver said.
What about Bain's role?
"To me, it's almost irrelevant," Silver said. "You take a business model that doesn't work, it doesn't matter how much money you have, or how much debt you have."
The video says, "By 2004, 365 stores had closed."
We asked Rick Tyler, a spokesman for Winning Our Future, for support for the ad's claims. He sent us a single Associated Press article from Jan. 29, 2004.
It reported KB's plans to cut 3,500 jobs and close at least 375 stores after a judge approved the chain's Chapter 11 bankruptcy reorganization.
The article said KB had filed to reorganize in January 2004, blaming "the Christmas season's sharp price wars and increased competition from mega-retailers like Wal-Mart." (The story didn't mention the company's debt burden.)
Chris Byrne, a toy industry analyst who wrote an "obituary" for KB Toys in 2008, notes that while the company did close 365 stores, it was part of a strategy that included expansion into KB Toy Works and KB Toys Outlet.
What killed the company wasn't so much its debt but poor strategy, he said.
Bain and the new executive team had tried to walk away from KB's closeout-old-toy strategy and compete with Toys "R" Us, Walmart and Target by selling new, hot toys at full markup, Byrne said. That resulted in a price war, forcing KB to lower its prices — and eroding margins. So the store tried to carry only a few hot toys, with closeout products in the back of the store.
"The numbers just wouldn't work," he said. "It was volume of toys and price as a function of square feet that, in my mind, really undid KB, not the taking of cash out by Bain. This is not the first time that a corporation has misread the toy industry."
"If the anti-Mitt Romney people were smarter ... they would be criticizing Bain for rushing into a business that it didn't fully understand, looking for an outcome that probably wasn't likely given the realities of the industry and its context at the time."
Still, was it a good idea to pull money out of a company struggling to find its place in a tough industry?
Roger Goddu, a former Toys "R" Us president who's now in the private equity business, had invested in KB Toys and consulted for two years with new management in 2005.
"In hindsight, it's possible that Bain may have taken a dividend on KB Toys that was too aggressive," Goddu said. "However, the issues at KB Toys were not one-dimensional or purely financial."
What seemed like a decent idea could have quickly looked foolish, he said.
"In a highly competitive season, which happens in the toy business, the financial health of KB Toys could change quickly, and I suspect that's indeed what happened," he said. "What may have seemed okay could change in a very short period of time, based on other factors influencing KB's operations."
Another private capital firm, Prentice Capital Management, bought KB Toys out of bankruptcy in 2005, ending Bain's reign. The toy store landed again in bankruptcy court in 2008, its stores gone by 2009.
The video King of Bain: When Mitt Romney Came to Town, claims that "Romney and Bain bought the 80-year-old company in 2000, loaded KB Toys with millions in debt, then used the money to repurchase Bain stock. The debt was too staggering. By 2004, 365 stores had closed." The clear implication is that Romney and Bain were responsible for the toy company's demise.
Bain Capital bought KB Toys in 2000, after Romney retired. He wouldn't have been involved in financial decisions, though he would have profited from them. The company did choose to take on debt, buy stock and pay investors a dividend, even as the toy store chain struggled to find its niche in a volatile industry.
But toy industry analysts agree that far more than debt drove KB Toys into bankruptcy court. It was a troubled company before Bain bought it, and Bain wasn't able to fix it. Did more debt hurt? Probably. But to blame Romney and Bain for the chain's downfall is to ignore critical facts that would give a different impression. We rate this claim Mostly False.
Winning Our Future, "King of Bain: When Mitt Romney Came to Town," video, Jan. 11, 2012
PolitiFact, "The PolitiFact guide to the anti-Romney 'King of Bain' video," Jan. 12, 2012
Email interview with Rick Tyler, spokesman for Winning Our Future, Jan. 12, 2012
Associated Press, "Toy chain says will cut 3,500 jobs and at least 375 stores," Jan. 29, 2004
Wall Street Journal, "KB Toys Faces Liquidation," Dec. 11, 2008
New York Times, "Buyout Profits Keep Flowing to Romney," Dec. 18, 2011
Email interview with Charlyn Lusk, public relations for Bain Capital, Stanton Public Relations & Marketing, Jan. 12, 2012
Fortune, "Gingrich's 'Bain bomb' fizzles," Jan. 12, 2012
Fortune, "Fact or Fiction? Romney's private equity past," Dec. 13, 2011
Bloomberg, "Romney Film Stretches Truth While Taking Comments Out of Context," Jan. 11, 2012
Washington Post Fact Checker, "Four Pinocchios for 'King of Bain,'" Jan. 12, 2012
Interview with Sean McGowan, senior analyst, leisure & lifestyle, Needham & Co., Jan. 12, 2012
Interview with Jim Silver, editor-in-chief, Time to Play magazine, Jan. 12, 2012
Email interview with Christopher Byrne, director of content for Time To Play, researcher, analyst and consultant with Byrne Communications, Jan. 12, 2012
Obit magazine, "KB Out of the Game," Dec. 15, 2008
Email interview with Roger Goddu, former Toys "R" Us president and KB Toys consultant, Jan. 12, 2012
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