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The Domino Effect

I consider myself a capitalist. As Larry Kudlow states on his CNBC show,”We believe that free market capitalism is the best path to prosperity!” And yet, there are times that I see certain situations that make me wonder if the system isn’t broken. Which leads me to ask the question, if something is legal, does that automatically make it right?

Let’s look at one deal that deserves a bit of discussion. The takeover of Domino’s pizza chain by Bain Capital. Here is the timeline for this series of events:

  • 1998 – Bain Capital buys Domino’s for $1.1 billion. $725 million is borrowed against the company, with Bain investing $385 million of their own cash.
  • 2003 – Bain refinances the debt, pulling out an additional $188 million to pay out to its investors. Domino’s debt is now nearly $1 billion.
  • 2004 – Domino’s is taken public by Bain. Bain retains 79% of the company,  and receives $108 million for the 21% sold to the public
  • 2010 – Bain sells out and over a 12 year period makes over 500% on their investment. Domino’s is saddled with a debt load with interest equal to half the company’s income.

I bring this up as an example of what seems to be a typical leveraged buy out. There’s always more to the story, but the common theme among the leveraged buyout I’ve studied are twofold, a lot of money is made in comparison to the amount invested, and the newly public company is left with a debt load that puts it at risk for bankruptcy for years to come.

In the end, the Domino’s franchises have increased and more people employed over the period, so on a positive note it wasn’t case of firing people and reorganizing. Nonetheless, I’m hard pressed to understand how these deals are shining examples of capitalism.


  • I Am 1 Percent March 15, 2012, 7:18 am

    Someone is making money after Bain sold in 2010, so I’m not sure what the problem is here. Bain made money, and the current owners have seen over a 150% increase in share price since the end of 2010…and they deserve it for buying a company so highly leveraged. High risk, high reward. The company revamped its image, and is increasing its top line year over year..

    What is the problem here? That Bain made too much? That someone took a risk, bought a highly leveraged Dominos from Bain, and made a lot of money too?

  • JOE March 15, 2012, 7:55 am

    The problem as I see it is little different from buying a house, convincing the banks to lend you more than it’s worth, and then selling the bank with the mortgage in place. I understand this (what Bain did) was all legal, but it seems smoke and mirrors to me. Of course, there’s a 12 year story I’m missing, buy so so I don’t see the process of LBOs as actually creating value, just looting the coffers of companies leaving them with debt.
    Thank for the comment, 1%er!

  • Evan March 15, 2012, 11:00 am

    Feels like you are not taking into the consideration that IF investors thought the leverage was too much they wouldn’t have bought in (increasing stock price) and Bain wouldn’t have made much of anything

  • JOE March 15, 2012, 4:27 pm

    I work for a company that was part of an LBO and then spun public. My own experience clouds my objective view on this.

  • Financial Independence March 16, 2012, 8:01 am

    Well it is part of the dream – there is always somebody out there naive enough to buy Domino’s.
    Of course it depends on the brokers commission. But if you will try hard enough – you will be a millionaire. Why not?

    Capitalism has nothing to do with fairness, or a right thing to do.

  • JOE March 16, 2012, 8:12 am

    This situation has far more to it than simply buying a stock, but you are right that for Bain to take Domino’s public again, investors had to be willing to buy.

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