Wednesday, May 23, 2012

What can President Obama learn from Bain Capital?

Everyone makes money by moving assets to higher valued uses:  workers sell their labor to employers who place a higher value on it; real estate agents earn money by finding higher value uses for houses; and private equity firms like Bain, make money by finding higher valued uses for our largest and most valuable assets, corporations.

Assembling component pieces into single entity creates value if the single entity is worth more than the sum of its component parts. Breaking up companies and selling off the component parts creates value if the component parts are worth more than the parent company. 

In addition, the threat of taking over under-performing corporate assets serves as an incentive to managers to maximize the value of the assets. Otherwise, someone else with a better idea may buy up the company, fire the managers and or, as I like to say, "move them to a higher-valued use."

President Obama has attacked Governor Romney for his association with Bain Capital, a private equity firm involved in the business of wealth creation.   The Economist thinks that Romney's response should be telling:
If Mr Romney can't defend against Mr Obama's attempt to turn his experience at Bain into a liability, he doesn't deserve to win.

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