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.
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
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.
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.
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.
> 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.
And that's not a good enough argument anymore. They did force this upon the company, and they are feeling absolutely none of the consequences of their decision.
How could Bain not predict that Amazon would dominate toy sells?
Toys R Us made a 10 year deal with Amazon to be the exclusuve toy seller in 1999, that had already fallen apart by 2005. Amazon was already the top online toy reteller by then.
As far as debtors being "screwed", hopefully they are both diversified enough and demanded enough of a risk premium for them to at least break even on their entire portfolio of loans.
"Fallen apart" is a nice way to put it. Another way to put it is that Amazon duped Toy's R Us into a terrible deal, learned everything they could about the toy market, then dumped them and violated their contract knowing that regardless of proceeding lawsuits (which Toys won) they would dominate the online toy space in the future. Everybody here blaming Bain, when the reality is that Toy R Us got thoroughly outplayed in the online space and never learned their lesson.
These were supposedly smart business people. You are always in danger when you outsource something that should be your core competency.
Apple learned that lesson a decade ago. If you look at the post Steve Jobs Apple, they brought more in house - retail, chip design, software, and rumors are they are trying to bring screen design more in house. Anything else, they try desperately not to depend on one supplier - commoditizing their compliments. (https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/)
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.
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
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.
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)
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 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.
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%.
