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Bankrupt Education Publisher Got the Romney Treatment

December 26, 2013

Back in November 2010, I wrote a piece titled "The End of the Tea Party." A year later, a version of that essay ("Tea Party Activists Are Just Republicans by Another Name") appeared in The Tea Party Movement, an anthology published by multi-billion dollar education publisher, Cengage Learning, Inc. But in the intervening two years, I had pretty much forgotten about it.
Forgotten, that is, until I received the first of several notices from the United States Bankruptcy Court for the Eastern District of New York. In July Cengage Learning filed for Chapter 11 bankruptcy protection in August. And as it turns out, its failure can be attributed to a cause quite familiar to anyone who followed the career of 2012 GOP presidential nominee Mitt Romney. Acquired in a leveraged buyout by a prominent private equity firm, Cengage Learning was saddled with excessive debt it could never hope to pay back.

As Bloomberg News reported on July 2:

Cengage Learning Inc. filed for bankruptcy protection more than five years after a buyout led by Apax Partners LLP left the textbook publisher with about $5.8 billion in debt.
Under a deal with some of its senior lenders, the company will try to use the bankruptcy case to eliminate $4 billion in debt, Cengage said in a statement today.

In 2007, private-equity group Apax led a $7.75 billion acquisition of Cengage from Thomson Reuters Corp. "Before it filed," Bloomberg noted, "Cengage faced mounting pressure to restructure its debt -- mostly from the 2007 leveraged buyout -- as payment deadlines loomed." And in an ironic twist, among those to whom Cengage owes money is a name that will ring a bell for American political junkies:

Greg Mankiw, a Harvard University professor who advised Republican presidential candidate Mitt Romney is owed $1.6 million in royalties, according to the bankruptcy filing.

You read that right. Mitt Romney's top economic adviser has fallen victim to the very business model Mitt Romney pioneered at Bain Capital. As I explained back in August 2012:

Your United States tax code doesn't merely allow the "carried interest exemption" that enables the likes of Mitt Romney to pay a lower rate than many middle class families. Without the public subsidy that is the corporate debt interest deduction, there might not be a Bain Capital--or a private equity industry as we know it--at all.

As the Wall Street Journal documented, "Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court." When it came to winning even when his portfolio companies lost, Mitt Romney, Josh Kosman explained, was a trailblazer:

Mitt Romney was a pioneer of this strategy. His private equity firm, Bain Capital, was the first large PE firm to make a serious portion of its money not from selling its companies or listing them on the stock exchange, but rather by collecting distributions and dividends, which in this context is the exact opposite of reinvesting in a company. Bain Capital is notorious for failing to plow profits back into its businesses.

Put another, private equity investors often make a killing even when their debt-saddled acquisitions become road kill. As Matt Taibbi lamented last year, "Essentially, Romney got rich in a business that couldn't exist without a perverse tax break, and he got to keep double his earnings because of another loophole - a pair of bureaucratic accidents that have not only teamed up to threaten us with a Mitt Romney presidency but that make future Romneys far more likely."
Far more likely, that is, whether there's a Cengage Learning--and a Tea Party--or not.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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