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How vulture capitalists ate Toys 'R' Us

185 points by amyjess 9y ago

harryh 9y ago
Contrary to what the author says the story about the leveraged buyout wasn't a footnote or somehow buried. In fact most of the storied I read on the topic mentioned the debt situation as a major factor in the bankruptcy. It's trivial to find dozens and dozens of stories on the topic: https://www.google.com/search?q=%22toys+r+us%22+%22leveraged+buyout%22 https://www.google.com/search?q=%22toys+r+us%22+%22leveraged...
oceanghost 9y ago
Competing against amazon with an animated Giraffe and a 3x markup was never going to work. If anything I'm surprised they made it this long. That is not to say that Bain, TPG, etc aren't objectively evil.
- jcater 9y ago
  You're overstating the markup, and they've price matched (including Amazon) for a while.
  - antris 9y ago
    "The guarantees typically require shoppers to provide proof of a lower advertised price on an identical item in stock at a nearby competitor’s store before a price match will be approved. However, many big-box retailers work directly with manufacturers and sell products with unique model numbers. As a result, the retailer can deny a price-match request, as no other store carries an "identical" item. Other common reasons for denial: the competitor is not "local," the ad lists a percent discount rather than a specific price, or the customer doesn't offer acceptable proof of the competitor's price.[9] Even if all criteria are met, retailers grant price-matching requests on a case-by-case basis at the discretion of store employees." https://en.wikipedia.org/wiki/Price-based_selling#Price-matching_guarantees https://en.wikipedia.org/wiki/Price-based_selling#Price-matc...
  - oceanghost 9y ago
    Where on the spectrum are you? :-) I was overstating the problem for comedic effect.
- Spooky23 9y ago
  Do you buy toys? Amazon is almost always the most expensive retailer.
  - gowld 9y ago
    What is less expensive than Amazon?
    - Spooky23 9y ago
      Pretty much anything as compared to Target, Walmart or ToysRUs. Plus, you’re less likely to get counterfeit product, and at Christmas you lose the risk of fulfillment fubar.
JumpCrisscross 9y ago
> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut short.
- mc32 9y ago
  Such as Sears, although their story is a bit complicated too by Eddie’s investments. But they have hung on for a bit too long, regardless, by not addressing internet retail.
- Disillusioned9 9y ago
  Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.
  - harryh 9y ago
    limited downsides It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.
    - kelleoeo 9y ago
      Rich people losing a fraction of their wealth and who will rebound thanks to business networking effects, and be given a pass because sometimes that’s how it goes Limited downside seems accurate
      - jerf 9y ago
        OK, what are you looking for? Rich people get one shot at doing something, and if they fail, the government comes riding in and takes all their stuff? You have to be careful when you get vindictive at rich people; they're also the employers, and it's hard to build a system where such people aren't "the rich". (If you hard-core leveled everyone in the world to equal wealth, nobody would be able to employ anybody else in the current sense of the term. People would have to pool their money and give it to somebody or set of somebodies to manage. And lo, watch "the rich" appear again as the people who successfully employ others get a return, and those who fail do not. It's really hard to avoid "the rich" also being "the employers".) I can pretty much guarantee someone, probably multiple someones, were called on the carpet at these firms, and did not get the "Oh well, just try again good buddy!" treatment.
ghaff 9y ago
>In other words, if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through. Maybe. It was already on a downward spiral. There's pretty much zero evidence that, left as a public company, they'd have figured out a way to reboot. It's not like there aren't plenty of other retail chains in dire straits.
- spamizbad 9y ago
  In 2003, in the pit of a recession, Toys 'R' Us was still profitable. It got caught flat-footed by the proliferation of Walmart/Target and online sales at the same time. Bain and KKR's turn-round strategy was largely a joke: They basically floated a bunch of trial balloons to the press, arguing that they weren't going to just be a toy store anymore (basically become a walmart or target) but that was scuttled. After that, they just decided to control costs as tightly as possible. Very little innovation. Prior to the buyout, there was a team inside Toys 'R' Us that was trying to clone Amazon's e-commerce success. It died with the buyout. Bain and KKR thought they had a better plan: they didn't.
  - Spooky23 9y ago
    The "turn around strategy" was do make the minimum viable noise that a turn around was in progress to avoid legal issues, borrow a metric ass-ton based on the assets that the company had, collect fees, etc. Everyone wins except for whomever was stuck holding the bag on the debt.
    - deleted 9y ago
      [deleted]
  - JumpCrisscross 9y ago
    > there was a team inside Toys 'R' Us that was trying to clone Amazon's e-commerce success If we flipped roles, with the team inside Toys 'R' Us trying to control costs before the PE firms came in and tried to make Amazon competitor, it would sound equally damning.
platz 9y ago
so then, why did the board of directors decide to put it up for sale? Whenever these stories about buyouts occur, it is framed as the buying company being the agent who has decided the future. e.g. > if Bain, KKR, and Vornado had never come along Why does no-one ever mention the board of directors who decide to put it up for sale? Are they not the true agents in this story? > Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through.
spodek 9y ago
Not sure if relevant, but it looked like the difference between most Toys 'R' Us products and centuries in a landfill were about a minute of smile followed by boredom. Bright, colorful, and passive. https://duckduckgo.com/?q=toys+r+us+shelves&bext=lcl&atb=v113-5&iax=images&ia=images&iai=https%3A%2F%2Fi.ytimg.com%2Fvi%2FutW4Wxw93lU%2Fmaxresdefault.jpg https://duckduckgo.com/?q=toys+r+us+shelves&bext=lcl&atb=v11...
reverend_gonzo 9y ago
This is written as if the entire purpose of buying Toy R US is to drive it into the ground. Those buying it, and those providing the loans to buy it, lost a lot of money on a bet that they could turn it around. They lost the bet, and so be it. The previous shareholders got paid and were able to move their capital out into something they believed would provide better returns. Sure, a lot of people lost their jobs. On the other side, a failing business that could likely not afford to pay well went out of business, and someone else will come in, buy the property, and need new employees. This isn't as bad as the article makes it out to be. If anything, its good that capitalists tried to turn it around, quickly failed, and now everyone can move onto other things. Slowly fading into oblivion over decades is not a good thing either.
- metabagel 9y ago
  We don't really know that they lost the bet. In fact, it seems equally, if not more likely that they profited on the deal, by siphoning money out of the company over the last 12 years. This is a good primer on how these firms operate: https://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829 https://www.rollingstone.com/politics/news/greed-and-debt-th...
  - reverend_gonzo 9y ago
    Matt Taibbi should not be writing about finance at all. You want someone who actually know's what they're talking about? Read Matt Levine's writings on Bloomberg.
whack 9y ago
The article, beginning with the title, makes it seem as if "vulture capitalists" were benefiting by feasting on Toys R Us. In reality, they lost a big pile of money by buying a company for $1.3B, which eventually became ~worthless via bankruptcy. They made a bet which failed, and paid the price for it, so I don't see any purpose in kicking them while they're down. I'm not sure how much money the creditors lost, but they knew exactly what they were getting themselves into, so it's hard to have much sympathy for them. Presumably, these "vulture capitalists" could only afford to make such a bet, because they had historically succeeded more often than they failed. If you're going to deride Bain/KKR as being bad for the economy, because of this failure, you should also have the intellectual consistency to compliment them for their successes in previous leveraged buyouts.
listenallyall 9y ago
TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story, in this case, KKR/Bain/Vornado were the suckers in the deal, they bought the rotten apple and suffered massive losses because of it. https://www.nytimes.com/2004/08/12/business/toys-r-us-says-it-may-leave-the-toy-business.html https://www.nytimes.com/2004/08/12/business/toys-r-us-says-i... https://www.nytimes.com/2005/03/18/business/company-news-toys-r-us-accepts-66-billion-buyout.html https://www.nytimes.com/2005/03/18/business/company-news-toy...
- InclinedPlane 9y ago
  Huh? Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. The losers were Toys R Us employees and customers and the banks who provided the loans.
  - JumpCrisscross 9y ago
    > Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. Bain et al lost over a billion dollars. Not only did they invest the equity, they also loaned some of the debt out of their own funds.
    - metabagel 9y ago
      They also charged exorbitant management fees. It seems at least possible that they didn't actually lose money on the deal. Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us.
      - justherefortart 9y ago
        Exactly, where'd that 5 billion in loans go? Poof!
nasmorn 9y ago
So they took a Company with 2.2b cash and cash equivalents private with just 1.3b of their own money. Man I need to network with gullible bankers too
- airstrike 9y ago
  There's nothing gullible about this kind of lending. LBOs are announced daily and cutting a 20-30% equity check is very common. Most of the time people make money on them -- sometimes a lot of money, if the timing, the target, and the fit is right. This wasn't one of such cases.
notMick 9y ago
This seems another vague anticapitalism story portraying the VCS as bad, whereas they bought a stake in the company and tried to turn it around. They also lost. 90% of new businesses fail - most often from not finding or matching/addressing the market. The market also changes so anyone who doesn't adapt end on the Darwinian company list.
Paul-ish 9y ago
Is there any analysis of leveraged buyouts over the last x years? Rather than selecting the ones that end in disaster. For example the Dell buyout [1] doesn't seem to have caused a catastrophe yet. Purely anecdotally, but I am typing this on a Dell desktop and regularly use a Dell laptop and I am very happy with both, I am particularly happy with their Linux support. [1] https://en.wikipedia.org/wiki/Dell#2013_buyout https://en.wikipedia.org/wiki/Dell#2013_buyout
- deleted 9y ago
  [deleted]
- merb 9y ago
  you can't compare the buyout of dell with toys 'R' us. I mean he actually got a 75% stake out of the buyout which means that he actually used a lot of his own cash to close the deal. Also after two years he could double the value of Dell. Something that is just amazing. In 2015 he bought EMC and made the biggest tech mergers in history. Dell now has 140.000 employees and has a revenue of like 60 billion annualy. I mean it's way harder to die if you combine dell, emc, pivotal, rsa and vmware...
aklemm 9y ago
Thought limited, my experience in Toys 'R' Us was that it was no more fun and exciting then the toy aisles at Target. So how was a dedicated toy store going to win that way? Compare that to shopping for home improvement; way more fun at Lowe's than the junky/limited aisles at Target.
- bluGill 9y ago
  They had a much larger selection that target. If you are looking for something specific target is less likely to have it. If you are looking for a toy - any toy - target will have something good enough.
wnevets 9y ago
Capitalists, you mean capitalists.
arx1422 9y ago
If the debt load was excessive on an otherwise OK business then the debt would be restructured vs. putting the company into liquidation. The idea that absent the debt Toys R Us would have figured out how to invest in innovation is totally speculative. This is a badly reasoned article.
- bluGill 9y ago
  That is partially up to the lenders though. The lenders have their input in bankruptcy court, and if they tell the court they want their money the court tends to listen. Lenders will generally agree to bankruptcy because it is better to be paid off in the future than take what they can get now. If the lenders don't think the company can actually find a way to pay off the debt that might want what they can get now so they can put it to better use. My understanding is the debt was so high the lenders figure anything that happens is just throwing good money after bad.
Animats 9y ago
That article links to a much more important article: "What caused the retail apocalypse?"[1] In the US, malls are dying, because the middle class that supported them is dying off. Toys-R-Us operated in malls and sold non-necessity goods. That business is dead. The direction US brick-and-mortar retail is headed is dollar stores at one end and luxury goods at the other, with little in between. Dollar General opens about 900 stores a year. [1] http://theweek.com/articles/697378/what-caused-retail-apocalypse http://theweek.com/articles/697378/what-caused-retail-apocal...
dbatten 9y ago
The author seems to be bending over backwards to make the buyers look like evil masterminds that profited from running Toys R Us into the ground... For example, he notes that they'll have to write off their investment in Toys R Us, but makes it sound like they're making out like bandits because they got $200 million in management/consulting fees out of the deal. So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me. More importantly, what if this had been a success? What if they had bought Toys R Us and orchestrated a phenomenal turn-around? Would this still be a story? Would they be evil, but this time they'd be evil because they stole a public company for pennies on the dollar (a la the Dell lawsuit) and made bank when it returned to growth and profitability? A significantly more dispassionate discussion about the debt burden that goes along with a leveraged buyout would have been far more interesting to read.
- bhouston 9y ago
  EDIT: This comment is wrong. > So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me. They only had to put up 20% of the 6.6B, thus $1.32B. The rest was put up by bond investors I believe. TRU was also paying upwards of $425M per year on the debt it had. Assuming that 20% of that was to the holders of the $1.32B debt, you get $90M of interest payments. Given that the LBO happened in 2004, there have been 13 years of interest payments, which totals now $1.1B roughly. I am unsure if any principle was paid off, there are no details for that. Thus $1.1B in interest + $200M in management fees = $1.3B of their investment, discounting inflation adjustments. Basically KKR, Bain and others are at least close to net zero even though they caused TRU to fail completely. Lastly, bankruptcy just means that it is insolvent, it doesn't mean that the current debtors get nothing. If the debtors in this case had control over TRU they can ensure it goes bankrupt early enough that it can cover the liabilities to its debtors, namely themselves. If the debtors can get even 50 cents on the dollar, they are net winners.
  - harryh 9y ago
    Assuming that 20% of that was to the holders of the $1.32B debt This is a very poor assumption. The PE firms bought equity in TRU, they are not paid back in the same way and on the same schedule as holders of debt.
panda888888 9y ago
Are you guys not familiar with the "Barbarians at the Gate" story of what happened with KKR & RJR Nabisco in the late 80s? I highly recommend you watch the movie or read the book if you don't know about it. The movie is excellent. Knowing that sequence of events, I feel like people should have realized that all of this would happen to Toys R Us.
8bitsrule 9y ago
Funny. I thought Toys 'R' Us was vulture capitalism, along with Wal-Mart.

185 points by amyjess 9y ago

Contrary to what the author says the story about the leveraged buyout wasn't a footnote or somehow buried. In fact most of the storied I read on the topic mentioned the debt situation as a major factor in the bankruptcy. It's trivial to find dozens and dozens of stories on the topic: https://www.google.com/search?q=%22toys+r+us%22+%22leveraged+buyout%22 https://www.google.com/search?q=%22toys+r+us%22+%22leveraged...

oceanghost 9y ago

Competing against amazon with an animated Giraffe and a 3x markup was never going to work. If anything I'm surprised they made it this long. That is not to say that Bain, TPG, etc aren't objectively evil.

jcater 9y ago
You're overstating the markup, and they've price matched (including Amazon) for a while.
- antris 9y ago
  "The guarantees typically require shoppers to provide proof of a lower advertised price on an identical item in stock at a nearby competitor’s store before a price match will be approved. However, many big-box retailers work directly with manufacturers and sell products with unique model numbers. As a result, the retailer can deny a price-match request, as no other store carries an "identical" item. Other common reasons for denial: the competitor is not "local," the ad lists a percent discount rather than a specific price, or the customer doesn't offer acceptable proof of the competitor's price.[9] Even if all criteria are met, retailers grant price-matching requests on a case-by-case basis at the discretion of store employees." https://en.wikipedia.org/wiki/Price-based_selling#Price-matching_guarantees https://en.wikipedia.org/wiki/Price-based_selling#Price-matc...
- oceanghost 9y ago
  Where on the spectrum are you? :-) I was overstating the problem for comedic effect.
Spooky23 9y ago
Do you buy toys? Amazon is almost always the most expensive retailer.
- gowld 9y ago
  What is less expensive than Amazon?
  - Spooky23 9y ago
    Pretty much anything as compared to Target, Walmart or ToysRUs. Plus, you’re less likely to get counterfeit product, and at Christmas you lose the risk of fulfillment fubar.

JumpCrisscross 9y ago

> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut short.

mc32 9y ago
Such as Sears, although their story is a bit complicated too by Eddie’s investments. But they have hung on for a bit too long, regardless, by not addressing internet retail.
Disillusioned9 9y ago
Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.
- harryh 9y ago
  limited downsides It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.
  - kelleoeo 9y ago
    Rich people losing a fraction of their wealth and who will rebound thanks to business networking effects, and be given a pass because sometimes that’s how it goes Limited downside seems accurate
    - jerf 9y ago
      OK, what are you looking for? Rich people get one shot at doing something, and if they fail, the government comes riding in and takes all their stuff? You have to be careful when you get vindictive at rich people; they're also the employers, and it's hard to build a system where such people aren't "the rich". (If you hard-core leveled everyone in the world to equal wealth, nobody would be able to employ anybody else in the current sense of the term. People would have to pool their money and give it to somebody or set of somebodies to manage. And lo, watch "the rich" appear again as the people who successfully employ others get a return, and those who fail do not. It's really hard to avoid "the rich" also being "the employers".) I can pretty much guarantee someone, probably multiple someones, were called on the carpet at these firms, and did not get the "Oh well, just try again good buddy!" treatment.

ghaff 9y ago

>In other words, if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through. Maybe. It was already on a downward spiral. There's pretty much zero evidence that, left as a public company, they'd have figured out a way to reboot. It's not like there aren't plenty of other retail chains in dire straits.

spamizbad 9y ago
In 2003, in the pit of a recession, Toys 'R' Us was still profitable. It got caught flat-footed by the proliferation of Walmart/Target and online sales at the same time. Bain and KKR's turn-round strategy was largely a joke: They basically floated a bunch of trial balloons to the press, arguing that they weren't going to just be a toy store anymore (basically become a walmart or target) but that was scuttled. After that, they just decided to control costs as tightly as possible. Very little innovation. Prior to the buyout, there was a team inside Toys 'R' Us that was trying to clone Amazon's e-commerce success. It died with the buyout. Bain and KKR thought they had a better plan: they didn't.
- Spooky23 9y ago
  The "turn around strategy" was do make the minimum viable noise that a turn around was in progress to avoid legal issues, borrow a metric ass-ton based on the assets that the company had, collect fees, etc. Everyone wins except for whomever was stuck holding the bag on the debt.
  - deleted 9y ago
    [deleted]
- JumpCrisscross 9y ago
  > there was a team inside Toys 'R' Us that was trying to clone Amazon's e-commerce success If we flipped roles, with the team inside Toys 'R' Us trying to control costs before the PE firms came in and tried to make Amazon competitor, it would sound equally damning.

platz 9y ago

so then, why did the board of directors decide to put it up for sale? Whenever these stories about buyouts occur, it is framed as the buying company being the agent who has decided the future. e.g. > if Bain, KKR, and Vornado had never come along Why does no-one ever mention the board of directors who decide to put it up for sale? Are they not the true agents in this story? > Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through.

spodek 9y ago

Not sure if relevant, but it looked like the difference between most Toys 'R' Us products and centuries in a landfill were about a minute of smile followed by boredom. Bright, colorful, and passive. https://duckduckgo.com/?q=toys+r+us+shelves&bext=lcl&atb=v113-5&iax=images&ia=images&iai=https%3A%2F%2Fi.ytimg.com%2Fvi%2FutW4Wxw93lU%2Fmaxresdefault.jpg https://duckduckgo.com/?q=toys+r+us+shelves&bext=lcl&atb=v11...

reverend_gonzo 9y ago

This is written as if the entire purpose of buying Toy R US is to drive it into the ground. Those buying it, and those providing the loans to buy it, lost a lot of money on a bet that they could turn it around. They lost the bet, and so be it. The previous shareholders got paid and were able to move their capital out into something they believed would provide better returns. Sure, a lot of people lost their jobs. On the other side, a failing business that could likely not afford to pay well went out of business, and someone else will come in, buy the property, and need new employees. This isn't as bad as the article makes it out to be. If anything, its good that capitalists tried to turn it around, quickly failed, and now everyone can move onto other things. Slowly fading into oblivion over decades is not a good thing either.

metabagel 9y ago
We don't really know that they lost the bet. In fact, it seems equally, if not more likely that they profited on the deal, by siphoning money out of the company over the last 12 years. This is a good primer on how these firms operate: https://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829 https://www.rollingstone.com/politics/news/greed-and-debt-th...
- reverend_gonzo 9y ago
  Matt Taibbi should not be writing about finance at all. You want someone who actually know's what they're talking about? Read Matt Levine's writings on Bloomberg.

whack 9y ago

The article, beginning with the title, makes it seem as if "vulture capitalists" were benefiting by feasting on Toys R Us. In reality, they lost a big pile of money by buying a company for $1.3B, which eventually became ~worthless via bankruptcy. They made a bet which failed, and paid the price for it, so I don't see any purpose in kicking them while they're down. I'm not sure how much money the creditors lost, but they knew exactly what they were getting themselves into, so it's hard to have much sympathy for them. Presumably, these "vulture capitalists" could only afford to make such a bet, because they had historically succeeded more often than they failed. If you're going to deride Bain/KKR as being bad for the economy, because of this failure, you should also have the intellectual consistency to compliment them for their successes in previous leveraged buyouts.

listenallyall 9y ago

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story, in this case, KKR/Bain/Vornado were the suckers in the deal, they bought the rotten apple and suffered massive losses because of it. https://www.nytimes.com/2004/08/12/business/toys-r-us-says-it-may-leave-the-toy-business.html https://www.nytimes.com/2004/08/12/business/toys-r-us-says-i... https://www.nytimes.com/2005/03/18/business/company-news-toys-r-us-accepts-66-billion-buyout.html https://www.nytimes.com/2005/03/18/business/company-news-toy...

InclinedPlane 9y ago
Huh? Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. The losers were Toys R Us employees and customers and the banks who provided the loans.
- JumpCrisscross 9y ago
  > Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. Bain et al lost over a billion dollars. Not only did they invest the equity, they also loaned some of the debt out of their own funds.
  - metabagel 9y ago
    They also charged exorbitant management fees. It seems at least possible that they didn't actually lose money on the deal. Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us.
    - justherefortart 9y ago
      Exactly, where'd that 5 billion in loans go? Poof!

nasmorn 9y ago

So they took a Company with 2.2b cash and cash equivalents private with just 1.3b of their own money. Man I need to network with gullible bankers too

airstrike 9y ago
There's nothing gullible about this kind of lending. LBOs are announced daily and cutting a 20-30% equity check is very common. Most of the time people make money on them -- sometimes a lot of money, if the timing, the target, and the fit is right. This wasn't one of such cases.

notMick 9y ago

This seems another vague anticapitalism story portraying the VCS as bad, whereas they bought a stake in the company and tried to turn it around. They also lost. 90% of new businesses fail - most often from not finding or matching/addressing the market. The market also changes so anyone who doesn't adapt end on the Darwinian company list.

Paul-ish 9y ago

Is there any analysis of leveraged buyouts over the last x years? Rather than selecting the ones that end in disaster. For example the Dell buyout [1] doesn't seem to have caused a catastrophe yet. Purely anecdotally, but I am typing this on a Dell desktop and regularly use a Dell laptop and I am very happy with both, I am particularly happy with their Linux support. [1] https://en.wikipedia.org/wiki/Dell#2013_buyout https://en.wikipedia.org/wiki/Dell#2013_buyout

deleted 9y ago
[deleted]
merb 9y ago
you can't compare the buyout of dell with toys 'R' us. I mean he actually got a 75% stake out of the buyout which means that he actually used a lot of his own cash to close the deal. Also after two years he could double the value of Dell. Something that is just amazing. In 2015 he bought EMC and made the biggest tech mergers in history. Dell now has 140.000 employees and has a revenue of like 60 billion annualy. I mean it's way harder to die if you combine dell, emc, pivotal, rsa and vmware...

aklemm 9y ago

Thought limited, my experience in Toys 'R' Us was that it was no more fun and exciting then the toy aisles at Target. So how was a dedicated toy store going to win that way? Compare that to shopping for home improvement; way more fun at Lowe's than the junky/limited aisles at Target.

bluGill 9y ago
They had a much larger selection that target. If you are looking for something specific target is less likely to have it. If you are looking for a toy - any toy - target will have something good enough.

wnevets 9y ago

Capitalists, you mean capitalists.

arx1422 9y ago

If the debt load was excessive on an otherwise OK business then the debt would be restructured vs. putting the company into liquidation. The idea that absent the debt Toys R Us would have figured out how to invest in innovation is totally speculative. This is a badly reasoned article.

bluGill 9y ago
That is partially up to the lenders though. The lenders have their input in bankruptcy court, and if they tell the court they want their money the court tends to listen. Lenders will generally agree to bankruptcy because it is better to be paid off in the future than take what they can get now. If the lenders don't think the company can actually find a way to pay off the debt that might want what they can get now so they can put it to better use. My understanding is the debt was so high the lenders figure anything that happens is just throwing good money after bad.

Animats 9y ago

That article links to a much more important article: "What caused the retail apocalypse?"[1] In the US, malls are dying, because the middle class that supported them is dying off. Toys-R-Us operated in malls and sold non-necessity goods. That business is dead. The direction US brick-and-mortar retail is headed is dollar stores at one end and luxury goods at the other, with little in between. Dollar General opens about 900 stores a year. [1] http://theweek.com/articles/697378/what-caused-retail-apocalypse http://theweek.com/articles/697378/what-caused-retail-apocal...

dbatten 9y ago

The author seems to be bending over backwards to make the buyers look like evil masterminds that profited from running Toys R Us into the ground... For example, he notes that they'll have to write off their investment in Toys R Us, but makes it sound like they're making out like bandits because they got $200 million in management/consulting fees out of the deal. So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me. More importantly, what if this had been a success? What if they had bought Toys R Us and orchestrated a phenomenal turn-around? Would this still be a story? Would they be evil, but this time they'd be evil because they stole a public company for pennies on the dollar (a la the Dell lawsuit) and made bank when it returned to growth and profitability? A significantly more dispassionate discussion about the debt burden that goes along with a leveraged buyout would have been far more interesting to read.

bhouston 9y ago
EDIT: This comment is wrong. > So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me. They only had to put up 20% of the 6.6B, thus $1.32B. The rest was put up by bond investors I believe. TRU was also paying upwards of $425M per year on the debt it had. Assuming that 20% of that was to the holders of the $1.32B debt, you get $90M of interest payments. Given that the LBO happened in 2004, there have been 13 years of interest payments, which totals now $1.1B roughly. I am unsure if any principle was paid off, there are no details for that. Thus $1.1B in interest + $200M in management fees = $1.3B of their investment, discounting inflation adjustments. Basically KKR, Bain and others are at least close to net zero even though they caused TRU to fail completely. Lastly, bankruptcy just means that it is insolvent, it doesn't mean that the current debtors get nothing. If the debtors in this case had control over TRU they can ensure it goes bankrupt early enough that it can cover the liabilities to its debtors, namely themselves. If the debtors can get even 50 cents on the dollar, they are net winners.
- harryh 9y ago
  Assuming that 20% of that was to the holders of the $1.32B debt This is a very poor assumption. The PE firms bought equity in TRU, they are not paid back in the same way and on the same schedule as holders of debt.

panda888888 9y ago

Are you guys not familiar with the "Barbarians at the Gate" story of what happened with KKR & RJR Nabisco in the late 80s? I highly recommend you watch the movie or read the book if you don't know about it. The movie is excellent. Knowing that sequence of events, I feel like people should have realized that all of this would happen to Toys R Us.

8bitsrule 9y ago

Funny. I thought Toys 'R' Us was vulture capitalism, along with Wal-Mart.