It was early 1987, and Mitt Romney was shopping. And he was angry.
He was walking the aisles of Staples, a little-known retail store his firm had bet $1.5 million on so far, and picking up office supplies. Then he waited in line at the checkout counter — for far too long.
To Romney, then chief executive of a fledgling investment firm called Bain Capital, it confirmed what friends had told him: A superstore with low prices was a good idea, but the lines took forever, the credit card machines weren’t working, the staff was “surly.” With just a few stores open since its launch in Brighton, Staples already had big problems.
“I was shopping there myself and found it a frustrating experience,’’ Romney would later say.
Staples went on to revolutionize the way office supplies were sold, and its founder, Tom Stemberg, would become a loyal political backer for Romney in his run for the presidency. But two-decade-old court documents unsealed last week offer a new glimpse into the early days of the start-up, revealing a rocky beginning long before Staples became a polished bullet point on Romney’s resume as a businessman and job creator. The filings, released at Norfolk Probate and Family Court at the request of the Globe, portray a retailer riddled with operational problems and contentious board fights, and shed light on Romney as a hard-nosed investor, leaning sternly on an entrepreneur for results.
Stemberg, a former supermarket executive, believed the inefficient business of small stationers could be improved so companies could buy office supplies in large volume. He hoped to launch a chain of big stores.
He met Romney in 1985, introduced by a partner from another local investment firm, Bessemer Venture Partners. Romney was skeptical that low-margin products such as paper clips and pens could translate into handsome profits. But after studying the market, he concluded that Staples could save businesses money. Bain and Bessemer wanted to be the lead investors. Then came the negotiations, and they were brutal.
“It was a very difficult and painful process,’’ Romney would recall while testifying on Stemberg’s behalf. “We found Tom difficult to deal with from a negotiating standpoint.” His comments were part of the unsealed filings from Stemberg’s divorce case in 1991.
Stemberg and his lawyer were driving a tough bargain, trying to keep “a very large portion” of the company for the founder, while Bain and the other investors were “of course thinking we should take a large portion of the company.”
The talks took weeks, Romney recalled, and they were longer and more grueling than any he and Bain had dealt with in the past. The negotiating process became so difficult, Romney said, that Sandy Samuels, a representative for one of the other investors, threw up his hands, saying, “I can’t take it any more, Mitt, you try.” Romney said he and Stemberg finally wore each other down.
“It was very clearly our intent to [reward] Tom handsomely if the company did spectacularly well. On the other hand, we did not want Tom to receive any reward if he were to turn out to be not an effective chief executive officer,” Romney said in his testimony.
Stemberg, who is now a professional investor himself at the venture capital firm Highland Capital Partners, declined to comment on the testimony from his divorce case, but did not dispute that the Staples negotiations were intense.
Indeed, such contentious face-offs are common, said Todd Dagres, a Boston venture capitalist whose deals have included Akamai Technologies and Twitter.
“The one thing that is an absolute rule is, the most successful entrepreneurs I’ve dealt with have been the most challenging,’’ said Dagres of Spark Capital. “Based on how successful Staples and Stemberg were, and Mitt has been, I would be shocked to learn if it was anything different.” Romney’s campaign declined to comment for this story.
With all the agreements in place, Staples started rolling out new stores. Woburn opened after Brighton, and Providence after that. But sales were ramping up slower than expected, Romney said. Immediately, the blame fell on Stemberg.
“The first area of concern was whether management or Tom in particular was selecting the right sites with sufficient care and whether we needed a different process for selecting sites,’’ Romney said. In addition, Romney was concerned that the stores were short on some merchandise, and that customers were staying away because of those inefficient checkout lines.
Romney said he and the rest of the board rode Stemberg hard. They wanted him to hire a chief operating officer with serious retail experience who could manage the operational issues. Stemberg resisted for a time, perhaps fearful the new executive would replace him, Romney speculated.
The problems continued into late 1987, and Romney was pessimistic about the company’s prospects. Bain’s goal was to make 10 times its money in five years in venture deals, he said, or about 58 percent a year. Fearing Staples could fail, he put less Bain money on the line in the third round of fund-raising, and helped put a value on the company’s private stock at $2.90 a share (an amount Stemberg’s ex-wife, Maureen, would later argue was too low).
“We were obviously proved wrong ultimately, but the price we thought was high at that stage given the company’s performance,’’ Romney said.
Meanwhile, Staples executives botched some presentations to the board, and yet another new store launch, in Port Chester, N.Y., took off too slowly. When Stemberg and supermarket magnate Leo Kahn, then Staples chairman, proposed an expensive new distribution center, some board members grew furious.
Samuels, the board representative for investor Fred Adler, said Adler was upset the company wasn’t growing faster. In fact, Adler was so frustrated, he invested in a Staples competitor, Office Depot in Florida, and suggested that they simply run Staples out of business, Romney recounted.
Romney went to New York to meet with Adler and try to talk him out of doing anything to harm Staples. It wasn’t a pleasant meeting.
“He was not friendly in the meeting and called me various names, and basically said, ‘It’s none of your business; we’ll do what we want to do,’ ’’ Romney said. Adler could not be reached for comment.
After that experience, Bain would institute rules barring co-investors in deals from backing competing companies. But Romney had to learn that the hard way.
There were some lessons of the business Romney had already learned by then, like that he had an inherent conflict of interest in carrying out his duties as a Staples director while also representing his firm’s interest as an investor.
“Those of us on the board who are also investors have a complicated role,’’ Romney said. “As board members we want to get as high a price as possible for the company, and as investors we want it low.”
Over the next few years, Staples grew to 24 stores and 1,100 employees. Bain would invest a total of $2.5 million. The plan was to take the company public in 1989 if it was profitable. And when it came to launching an IPO or selling the company, Romney felt that Bain’s interests were aligned with Stemberg’s, in wanting to fetch the highest price possible.
Still, Romney remained a skeptic about Staples’ prospects for a long time, according to his testimony, maintaining that many start-ups fail, and reeling off cold statistics that betrayed no illusions about Staples’ chances. He said he felt there was a 25 percent chance Staples would be successful, 25 percent that it would be an “OK investment,” another 25 percent probability it would be a “bad investment but we’d get our money back,” and a “25 percent probability we’d lose money.”
Romney was this pessimistic, even though Wall Street’s Goldman Sachs & Co. wanted to help do a deal and Staples already had a suitor. Sears was interested in acquiring the company and sent representatives to meet with Stemberg and Romney.
The price to sell, Romney told them, was $100 million to $130 million. But the Sears offer didn’t come close.
By April 1989, Staples went public at $19 a share and jumped to $22.50 in the first day of trading. The company’s value soared to more than $200 million, and Bain ultimately would make $13 million on its investment. Stemberg made even more.
It was a small sum compared with the massive profits Bain was starting to reap in leveraged buyouts. But it would be one of the few successful start-ups Romney could claim to have worked closely on. Today, Staples is the world’s largest office supply company, with more than 1,870 stores, 88,000 employees, and a market capitalization of $7.8 billion. Bain no longer has a stake in the company, which is facing challenges in the digital era as offices shift away from traditional paper and pen. But Staples has remained a centerpiece of Romney’s campaign narrative about understanding small business.
Speaking over the summer at the Republican National Convention, Stemberg recalled none of the hardships of the early days, just Romney’s willingness to help. “He never looked at Staples merely as a financial investment,’’ Stemberg said. “He saw the engine of prosperity it would become.”