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Comment by untog | Hacker News Reader

To those saying Toys R Us was doomed because of toys going digital or anything like that: not so fast.

> A year later the company was taken private by KKR, Bain Capital and real estate firm Vornado. The $6.6 billion purchase left it with $5.3 billion in debt secured by its assets and it never really recovered.

http://money.cnn.com/2018/03/15/news/companies/toys-r-us-clo...

Maybe the physicial toys business is totally screwed, but this isn't evidence of that. It's evidence of a company being loaded down with debt and drowning under it.

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Ah, the smoking gun. This is what happened to Maplin as well.

In both cases the underlying business might be failing, but this kind of debt-encumbering buyout purchase usually results in a transfer of money from both what's left in the business and also the (bank) creditors to the capital firms.

So, is taking it private a way to avoid scrutiny while they bleed the company dry? Or am I completely wrong?

It can be. That doesn't mean it is.

Going private allows a company to focus less on shareholder value (its legal first obligation as a traded company save for a legally defendable company charter that counters this in any way, which is rarer than it should be). That theoretically allows it to focus on growth or market entrenchment before profits, and take risks otherwise you wouldn't be able to take without risks of lawsuits.

It allows more freedom in restructuring and financial business decisions. The downside to that is when a vulture capitals like Bain or Ichan comes along, their motives are to extract as much profit from the 'asset' as possible for themselves regardless of the outcome to the business.

It stands in start contrast to venture capital firms that actually care about success. its usually obvious which one 'investors' are. If they're willing to put up money and take risks with you at the start, they're venture. If they're coming along after you're successful but struggling with a 'grand plan' to restructure and improve your business if you accept their money (and hand over way more control than you should), they're vulture.

All of that is just my observations of course. I'm open to counter arguments.

> its legal first obligation as a traded company save for a legally defendable company charter that counters this in any way

This is widely claimed but there is no such requirement:

https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v...

The reason is obvious: it’s hard to predict over any non-trivial time in the future, so there’s a broad deference to business judgement. In the case of Toys-R-Us, for example, if they’d been a public company at the time that argument could simply be that lower returns to shareholders now was critical to the long-term health of the business. People who disagreed could sell their shares or attempt to find enough like minded shareholders to replace the leadership but nobody could say their view is unambiguously correct and so the law stays out of it.

I don’t understand you’re hostility to what you call vulture capitals.

If the assets of a company are worth more than the business as a going concern, shouldn’t the assets be liquidated or repurposed for more effective purposes?

Depends on what "worth more" means. From a purely monetary standpoint liquidation that might be true. But giving VCs who are likely already rich more money vs. taking away peoples jobs isn't always the best way to "repurpose" money.

Presumably they do something with that wealth like invest it in a more profitable company or one with better prospects. If the company is unprofitable with their resources they’re destroying wealth which doesn’t serve the economy or society.

But the company was profitable before the VCs "restructured" it to basically steal (legally) everything they could. That's how the Vulture Capitalists work, there are other comments detailing this. Just because you can make money doesn't mean you should.

This narrative about vulture capitalists seems off. The CNN Money article first says:

> Its debt was downgraded to junk bond status in January of 2005, at a time when Amazon's sales were just 4% of their current level.

And then it says:

> A year later the company was taken private by KKR, Bain Capital and real estate firm Vornado.

The fact that their bonds were downgraded to junk a year before tells me that Toys R Us was already in trouble by the time private equity stepped in.

Is lining up pockets of third-parties a "more effective purpose"? Also, it seems to me that your computer could be used more effectively if it was a part of my scientific computing platform. Can I take it now?

You can buy it from me, which is what venture capitalists do. You can buy it from me and use it as collateral against a loan provided by a bank. I don’t see anything wrong with this.

That’s not a good comparison. What they’re doing is taking out loans against the business’ future value, buying it, stripping all of the assets and charging large mismanagement fees, and then letting it go bankrupt so other people pick up the costs. There’s not really a market where I could take a distributed computing loan against your computer, put the CPU into a different system, and default on the loan.

I honestly don’t see how this works, are you saying the banks are taking a massive loss on this venture? If so, wouldn’t the banks rationally avoid making loans to companies acquired by vultures, since they would always lose money to them? Who are the individuals taking a massive loss?

I’m asking basically why anyone would loan money to Toys R Us after it was acquired by corporate raiders.

The "lining of pockets" is deployed as investments in other companies. It isn't stuffed into a mattress. The richest people in our society live off an infinitesimally small amount of their wealth. The lion's share is deployed as investment (company stock, bonds, etc). It makes some sense to entrust this discretion over resources to people who have demonstrated an ability to manage resources at scale.

The people in question routinely bankrupt companies as a part of their method of operation. How is that possibly demonstrating an ability to manage resources at scale?

Thank you for the explanation.

It's the white collar version of walking out with chairs and the coffee machine -- so, naturally, 1000x more damaging and 1000x less illegal.

Great analogy

Yes, another disastrous private equity takeover. Debt servicing and management fees to the private equity funds take so much money out of the company that there is little left for innovation or tactical missteps.

Sometimes you will see that private equity only comes in when the company is in trouble anyway but I don't think Toys 'R Us was in the bad of shape when Bain and KKR showed up.

I was under the impression that the "disaster" was entirely intentional and for profit.

Toys R Us wasn't doing so well before the leveraged buy out either. Declining retail firms seem to turn to leveraged buyouts as a way to gain capital to give it one last big push, and then wind down in 5-10 years. Without the buyout, they would probably slowly dwindle over 20 years.

So how does this work out for KKR, Bain Capital and Vornado? Surely if the business goes bust, they're left saddled with the debt?

They usually do well for two reasons. First, the debt is on the books of the company they take over, not the private equity firm. Second, once they have control of the company they charge it 'management fees' for the executives and consultants they assign to run the firm.

They’re also free to loot assets: e.g. one popular technique is to transfer things like real estate and then have the former owner rent its stores back. At the end, they have that property to sell with none of the obligations.

Oh I wouldn't count on that. I'm not sure in this case, but PE usually has a way to "win" even if the company does not.

https://foragerfunds.com/bristlemouth/dick-smith-is-the-grea...

In Fargo season three [mild spoilers] they portray this kind of hostile takeover, albeit rather more dramatically. It's a big twist at the end of the story (for those not already aware) when it turns out what the villains were doing in this regard was not actually illegal, if done properly.

What I'd like to know is did those firms make money (by leaving the lender holding the bag) or did they lose money (the money they spent to buy the company)?

Sears also seems to be headed down the same path, and I have the same question there.

Bain Capital strikes again!

I wonder if the capital structure of a business determines whether it continues to operate. If the debt-holders thought they could maximize value by keep the stores open, they would. Instead they have decided that liquidation maximizes value. If there were no debt, equity holders might still decide that being bought out by a company that could better use the buildings would maximize value.

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