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It's important to note that a lot of the failure of Toys R Us has to do with private equity buyout rather than a poor business model. Of course, their business

It's important to note that a lot of the failure of Toys R Us has to do with private equity buyout rather than a poor business model. Of course, their business model was flawed, but remember that Toys R Us was bought in 2005, and the toy market was MUCH simpler back then. Amazon was hardly the player it is now. The private equity firm then loaded them up with crippling debt. Move forward a few years, and enter Amazon et al, and market situations shifted drastically. Toys R Us, loaded with debt from the private equity buyout, could not invest in their own infrastructure and improvements. Even if they had the perfect business model to capitalize on, they would have no cash to execute, and regardless, they would be forced to bankruptcy. In this case, they had so much debt that they couldn't escape chapter 11 and had to resort to chapter 7. And so it goes.

ceejayoz 9y ago
Cite for the above: https://www.bloomberg.com/news/articles/2018-03-16/who-killed-geoffrey-the-giraffe-the-last-days-of-toys-r-us https://www.bloomberg.com/news/articles/2018-03-16/who-kille... Buy company. Take out massive debts on company's books. Withdraw hundreds of millions in "fees". Let company collapse. Rinse, repeat.
- MadBohr 9y ago
  NY Times also has a good article on it: https://www.nytimes.com/2018/03/15/business/toys-r-us-bankruptcy.html https://www.nytimes.com/2018/03/15/business/toys-r-us-bankru...
- olivermarks 9y ago
  Taking a corporation private, loading it with billions in debt, starving it of funding and sucking it dry before collapse should be a criminal offense IMO
  - MadBohr 9y ago
    Unfortunately that's the nature of business. Sometimes it's impossible to predict market situations 10, 15 years out. I doubt anybody at Bain could have predicted in 2005 that Amazon would completely dominate the retail market in 10 years. Also, some responsibility falls on the debtors themselves for taking on potentially risky investments, but there are so many loopholes and gotchas here that I really can't comment much on that. While this type of private equity story seems more and more common these days, the opposite happens fairly often as well, and private equity firms like Bain make insane amounts of money from these types of strategies. Bankruptcy in general is shady though and no matter what, when it happens, somebody is getting screwed out of a lot of money... usually the debtors.
    - nradov 9y ago
      Amazon doesn't dominate the retail market. Walmart still has much higher retail revenue.
    - s73v3r_ 9y ago
      Excusing this as "the nature of business" is extremely defeatist. We could easily make it so that Bain is back on the hook for these debts, so that they actually care about the outcome of the company. Keep in mind, Toys R Us had some 20% of the online toy market. And without the debt hanging around their neck, they'd actually have funds to invest in competing.
      - opmac 9y ago
        I don't think you fully understand how this works. Bain doesn't get off the hook here with zero losses. In these bankruptcy situations, equity holds (Bain) usually get their equity stake wiped completely. If they had hundreds of millions/billions of dollars in equity, all of that is now gone. They will recover some of the money from the liquidation of assets however they will immediately use that to pay of their own debts. The debtors however get screwed even further... most if not all of them get absolutely nothing.
        s73v3r_ 9y ago
        "Bain doesn't get off the hook here with zero losses." They make the company pay them dividends while saddling the company with their debt. "The debtors however get screwed even further... most if not all of them get absolutely nothing." And yet, they keep lending to these vultures. I have no sympathy.
        opmac 9y ago
        > They make the company pay them dividends while saddling the company with their debt. Yes that is true. Is the sum of dividends over X years >= the amount of equity wiped out in a Chapter 7 liquidation? Impossible to say... the company is private. > They make They didn't make them do anything. They bought the company... they can do what they want as owners. That's just how this game works.
  - maxerickson 9y ago
    I think the terms of the loans matter a little bit. If the money is coming from investors that are getting bad advice, that's a problem. If Warren Buffett wants to risk $4 billion on some Bain scheme, meh.
    - olivermarks 9y ago
      Private equity deals where a major employer is loaded with debts on purchase usually cripple the company and turn it into an also ran. You'd think politicians would insert themselves at this point particularly when companies collapse. TRU is by no means the first company this has happened to. Manchester United in the UK were bought and loaded up with debt. They are ok now as the team is doing well, but if they stumble there is a colossal mountain of debt that still needs servicing regardless. The whole concept of being allowed to financialize delicate businesses needs more regulation IMO
- martinald 9y ago
  Are the companies that are writing these massive debts actually making money at the end of the day though? If that stops then the whole industry and practice will stop.
  - mathattack 9y ago
    Generally yes. Otherwise they don’t do them. But when the market gets frothy, a bunch lose at once. (And the life insurance companies and pensions counting on them get hurt)
- ars 9y ago
  Claire's and Sears were killed by the exact same thing.
  - jstarfish 9y ago
    Sears already had a mail-order business that sold literally everything from hand tools to houses. The venerable Sears Catalog was amazon.com in printed form. A bust-out scheme is the least of their failings.
rubicon33 9y ago
Can you or someone else explain to me why a firm would buy a company, and then "load them with debt"? Was the debt intended to help them grow?
- sky_rw 9y ago
  A leveraged buy out like the one Bain Capital used here is often used to milk cashflow and value out of a business that is in a bad position. They essentially seized on the opportunity that Toys R Us' bad decisions left them in to buy them with debt and use them as an ATM. I suspect that Bain didn't care about letting them grow, and saw this as an opportunity to bleed out all value from them for their remaining years until they could file for bankruptcy and liquidate.
- ggg9990 9y ago
  No, the debt is intended to give them leverage. Have $300 million but want to get the returns of having a $3 billion company? Use debt to make up the difference, make $600 million if the value goes up 20%, and leave some pension fund dumbasses holding the bag if the price goes down 20%.
- acomjean 9y ago
  The question I have is who loans a company like that money?
  - sky_rw 9y ago
    Your parent's pension fund most likely.

ceejayoz 9y ago

Cite for the above: https://www.bloomberg.com/news/articles/2018-03-16/who-killed-geoffrey-the-giraffe-the-last-days-of-toys-r-us https://www.bloomberg.com/news/articles/2018-03-16/who-kille... Buy company. Take out massive debts on company's books. Withdraw hundreds of millions in "fees". Let company collapse. Rinse, repeat.

MadBohr 9y ago
NY Times also has a good article on it: https://www.nytimes.com/2018/03/15/business/toys-r-us-bankruptcy.html https://www.nytimes.com/2018/03/15/business/toys-r-us-bankru...
olivermarks 9y ago
Taking a corporation private, loading it with billions in debt, starving it of funding and sucking it dry before collapse should be a criminal offense IMO
- MadBohr 9y ago
  Unfortunately that's the nature of business. Sometimes it's impossible to predict market situations 10, 15 years out. I doubt anybody at Bain could have predicted in 2005 that Amazon would completely dominate the retail market in 10 years. Also, some responsibility falls on the debtors themselves for taking on potentially risky investments, but there are so many loopholes and gotchas here that I really can't comment much on that. While this type of private equity story seems more and more common these days, the opposite happens fairly often as well, and private equity firms like Bain make insane amounts of money from these types of strategies. Bankruptcy in general is shady though and no matter what, when it happens, somebody is getting screwed out of a lot of money... usually the debtors.
  - nradov 9y ago
    Amazon doesn't dominate the retail market. Walmart still has much higher retail revenue.
  - s73v3r_ 9y ago
    Excusing this as "the nature of business" is extremely defeatist. We could easily make it so that Bain is back on the hook for these debts, so that they actually care about the outcome of the company. Keep in mind, Toys R Us had some 20% of the online toy market. And without the debt hanging around their neck, they'd actually have funds to invest in competing.
    - opmac 9y ago
      I don't think you fully understand how this works. Bain doesn't get off the hook here with zero losses. In these bankruptcy situations, equity holds (Bain) usually get their equity stake wiped completely. If they had hundreds of millions/billions of dollars in equity, all of that is now gone. They will recover some of the money from the liquidation of assets however they will immediately use that to pay of their own debts. The debtors however get screwed even further... most if not all of them get absolutely nothing.
      - s73v3r_ 9y ago
        "Bain doesn't get off the hook here with zero losses." They make the company pay them dividends while saddling the company with their debt. "The debtors however get screwed even further... most if not all of them get absolutely nothing." And yet, they keep lending to these vultures. I have no sympathy.
        opmac 9y ago
        > They make the company pay them dividends while saddling the company with their debt. Yes that is true. Is the sum of dividends over X years >= the amount of equity wiped out in a Chapter 7 liquidation? Impossible to say... the company is private. > They make They didn't make them do anything. They bought the company... they can do what they want as owners. That's just how this game works.
- maxerickson 9y ago
  I think the terms of the loans matter a little bit. If the money is coming from investors that are getting bad advice, that's a problem. If Warren Buffett wants to risk $4 billion on some Bain scheme, meh.
  - olivermarks 9y ago
    Private equity deals where a major employer is loaded with debts on purchase usually cripple the company and turn it into an also ran. You'd think politicians would insert themselves at this point particularly when companies collapse. TRU is by no means the first company this has happened to. Manchester United in the UK were bought and loaded up with debt. They are ok now as the team is doing well, but if they stumble there is a colossal mountain of debt that still needs servicing regardless. The whole concept of being allowed to financialize delicate businesses needs more regulation IMO
martinald 9y ago
Are the companies that are writing these massive debts actually making money at the end of the day though? If that stops then the whole industry and practice will stop.
- mathattack 9y ago
  Generally yes. Otherwise they don’t do them. But when the market gets frothy, a bunch lose at once. (And the life insurance companies and pensions counting on them get hurt)
ars 9y ago
Claire's and Sears were killed by the exact same thing.
- jstarfish 9y ago
  Sears already had a mail-order business that sold literally everything from hand tools to houses. The venerable Sears Catalog was amazon.com in printed form. A bust-out scheme is the least of their failings.

rubicon33 9y ago

Can you or someone else explain to me why a firm would buy a company, and then "load them with debt"? Was the debt intended to help them grow?

sky_rw 9y ago
A leveraged buy out like the one Bain Capital used here is often used to milk cashflow and value out of a business that is in a bad position. They essentially seized on the opportunity that Toys R Us' bad decisions left them in to buy them with debt and use them as an ATM. I suspect that Bain didn't care about letting them grow, and saw this as an opportunity to bleed out all value from them for their remaining years until they could file for bankruptcy and liquidate.
ggg9990 9y ago
No, the debt is intended to give them leverage. Have $300 million but want to get the returns of having a $3 billion company? Use debt to make up the difference, make $600 million if the value goes up 20%, and leave some pension fund dumbasses holding the bag if the price goes down 20%.
acomjean 9y ago
The question I have is who loans a company like that money?
- sky_rw 9y ago
  Your parent's pension fund most likely.