Darth Vader and Princess Leia?

Last week the private equity firm Bain Capital announced that it had won a bit to buy half of Toms an “ethical” shoe maker which is known for donating a pair of shoes to children in need for every pair of shoes purchased.  According to the Financial Times, Tom’s has captured 3% of the women’s casual footwear market and has given away 25 million pairs of shoes since its 2006 founding.  Tom’s is one of a number of companies that have practiced “doing well by doing good” a central premise in a socially responsible business philosophy. Tom’s is thought of as a “social enterprise” a classification of business where a business model is used to create improvements in the human condition. Bain on the other hand is the financial firm that American’s love to hate, because of its close association with Mitt Romney and his unsuccessful run for the Presidency in 2012.  Romney was one of the founding partners of Bain Capital and in his campaign he repeatedly touted his and Bain’s role in creating jobs and wealth and the media took great pleasure in uncovering tales which seem to indicate the opposite was true.  Less reported on at the time was the sheer number of public pension funds and colleges and universities that invested money with Bain. I found it ironic that labor unions were bashing Romney while their pensioners were collecting checks comprised in part from Bain earnings.  But perhaps the pensioners donated this portion to charity?

Why do I find the Bain/Toms transaction interesting?  First was that Bain was the winner in an “auction” process, meaning that Tom’s had rationally conducted a sale process.  Blake Mycoskie the founder of Tom’s will keep half of the shares but has also stated publicly that he intends to take half the profits from the shares he sold to Bain and use them to fund charitable endeavors perhaps a fund to finance other social enterprises.  The enterprise value (which includes debt) of the deal is reported to be $625 million which means that Mr. Mycoskie likely has a considerable amount of cash to fund his charitable activities.  In an interesting footnote for Vermonters, one of the reported losers in the Tom’s auction was Apax, one of the funds that owned a stake in Dealer.com before it was sold to Dealertrack late last year. 

Second, the reports of the Tom’s transactions note that Bain now owns 50% of the company and founder Mr. Mycoskie owns the other 50%. I did a quick web search to figure out if anyone had delved into just how the company would be governed going forward but did not find anything definitive. As students of business know if a company is split 50/50 and all the stock carries equal rights and preferences then no shareholder actually controls the company.  I have trouble believing that either Bain or Mycoskie would get into a relationship where future governance is not clearly spelled out.  It remains to be seen who will control the board in the future and whether the Bain stock carries certain preferences and rights that may give it actual control.  For now Bain and principal Ryan Cotton who is acting as spokesperson for the deal are certainly saying all the right things to assuage any concern that stakeholders should be worried about the future social mission of the company.  We can watch how reality unfolds over time.  It will be an interesting case study not unlike Unilever and Ben and Jerry’s and Danone and Stoneyfield Farms.

Third if you are a budding social enterprise entrepreneur you might be heartened to discover that you can indeed build a mission driven company that can attract the interest of more than one outside buyer.  Mr. Mycoskie has created great wealth for himself and seems to intend to use a considerable portion of this wealth to do further good.  This is not necessarily a bad thing particularly if encourages an entrepreneur to create a social venture rather than a venture that simply builds the next version of angry birds.

Fourth is there any subtle signal being given off by this transaction?  For instance in Vermont you can’t spit without spraying a money manager that fancies himself or herself to be socially responsible.  But in the wider world it’s much harder to find socially responsible money managers.  If you are an institutional investor such as a pension fund or college endowment investing billions of dollars it is almost impossible to fund such an investment manager.  For instance one of the reasons that pension funds and college endowments resist the call for divestment in oil and gas stocks is that it is not particularly simple to find managers who can manage large sums of money in a socially responsible fashion.  Although this is but one small transaction, might Bain be sending a subtle signal here that by purchasing a significant stake in a very high profile social enterprise, it is a large ($75 billion at a recent count) money manager that sees the future and is willing to move in that direction? I would bet that the upcoming pitch decks that Bain uses to pitch its next fund offering might highlight this transaction as emblematic of a new direction. Or perhaps this is simply an opportunistic one off transaction.  

Cairn Cross