Toys 'R' Us Founder Charles Lazarus Dies at 94

I'm having a struggle with whether this seems moral or not. B is saddled with a big debt, and employees of company B may suffer as a result of this (anything from losing bonuses or profit sharing opportunities, to losing headcount, or having the very future of the company put into question). The new owners also have to live with this situation, while the old owners skip merrily away with their profits gleaned from the future work that will be done to pay down the loan.

This seems negative, but has to be balanced with the fact that the shareholders of company B are the owners of the company, and it is their decision to do as they wish; if they're offered a certain sum for their shares, it's their choice to take it. It's unfortunate that this comes with blindness to the future impact of that action, but this may be a necessary or at least presently contingent artifact of capitalism.

But generally the high amount of leverage implies aggressive cost cutting, which negatively impacts the employees and in some cases R&D, which in turn means risking the future sustainability of the company for short term profits.

If you're interested in the topic, "Barbarians at the Gate" is a great book to understand the in and outs of LBO's. The writing style also makes it fun to read.

I can say from personal experience if Blackstone buys your company you'll be focusing on the second objective.

The ones who win are the corporate finance companies who make $ by arranging these complex financial instruments.

Debt is cheaper than equity. The purchaser isn't diluting their equity returns as much so in theory they're getting a higher return. Interest is usually slightly higher than usual corporate lending so banks win. The profits should be more positive so the purchasee employees should be better off.

So a LBO is a generally good idea other than its much more complicated and only scales to large purchases (like a nationwide toy store, perhaps)

The effect you're probably confusing with the cause, is a deal thats dead, zero-sum or worse, with a pure equity structure might barely flip slightly positive if you do some financial alchemy and run it as a LBO... however thats exactly the kind of situation thats highly likely to crash and burn, no matter what you do. Essentially you get to try doing nothing and go out of business two years ago, do a pure equity deal and go out of business last year, or do a LBO and go out of business this year, or maybe, possibly, LBO has the best chance of making it.

Its a common pattern often seen in military or business argument, a small scale tactic that maximizes success (minimalizes failure, I guess) when in retreat somehow gets blamed as the sole cause of the entire retreat itself. Smoke grenades screen a retreat better than clear air, therefore the war was lost or maybe a bad idea to start because we tossed smoke, well, it doesn't really work that way.

In a very wide sense you are sort of correct that a deal or a company thats only microscopically barely alive by using every trick in the book including LBOs is correctly perceived as a dead company walking; just remember that almost all companies that successfully LBO are never talked about, therefore in a weird survivorship bias like scenario the general public will never hear about LBOs except in the case of a dead company. A good analogy would be lots of people who die immediately spent some time in a ICU, therefore there seems no purpose to ICUs other than death. However, many/most people only spend a little while in ICU and then recover but you'll never hear about it, they'll just call it post op recovery or critical care or some similar euphemism.

Another weird medical analogy is doctors play an odds game. If the medical advice is the lowest risk treatment X is 90% success and 10% fatal, one patient dying doesn't disprove that advice, especially if 9 or more live, also you're only likely to hear about the fatalities which causes a false belief that docs are always wrong.

The reason they went bankrupt is that a private equity company bought them in an LBO and the debt load became unserviceable.

If you go back a bit further, TRU had tried and failed a couple of years to do their own ecommerce. IIRC, both attempts were built on coldfusion, and both failed pretty hard. Not that it was necessarily solely CF's fault, but there were problems (probably a combination of technical and political) that prevented TRU from doing their own ecommerce. A deal with Amazon to handle your ecommerce was probably about the dumbest "short term thinking" move a company that size could make. I say it with the experience of having worked in ecommerce in 1998/99/2000 and saw behind the scenes of some pretty large operations. It wasn't pretty, but TRU could certainly have made things work on their own or outsourcing to a company like where I was working then, and it would have worked, without resorting to Amazon.

That place was magical to me as a kid. (1980s, if it isn't obvious.)