An unprofitable company is an overall loss by definition - sure it's providing some value to some people, but it's consuming more value than it produces.
Killing the company quickly frees up the things it was consuming to be used for more productive things. Those buildings can be used for better businesses, or replaced with housing or parks or what-have-you. Other companies can offer better jobs to those workers (we're at close to full employment at the moment, and declining companies are not fun or fulfilling places to work). Money that was invested in that company can be put to more productive work in other businesses.
The impact of the death of ToysRUs will be significant to the toy industry as a whole, as Walmart/Target only devote a couple of hundred linear feet to toys, and Amazon has killed the little shops that powered the long tail.
"The departure of Toys 'R' Us from the retail landscape will give a boost to neighborhood toy shops.
That’s according to the American Specialty Toy Retailing Association, which predicted that 2018 will be the best year yet for neighborhood toy stores nationwide as consumers flock to these stores in the wake of the closure of Toys 'R' Us."
https://www.chainstoreage.com/finance-0/group-predicts-boom-...
To the extent that vendors were relying on being propped up by an unprofitable Toys R Us who bought their product for more than it was worth, it's the same effect one level up: those vendors were consuming more value than they produced.
The assets don't disappear. They're just being re-purposed earlier. Toys 'R' Us locations nationwide are being purchased and turned into new, arguably more-useful, things.
Are you accounting for general economic climate? Toys 'R' Us locations appear to be getting purchased [1][2]
[1] https://www.bizjournals.com/bizwomen/news/latest-news/2018/0...
[2] https://www.ctvnews.ca/business/toys-r-us-ends-canadian-stor...
Regardless, the capital that would otherwise be invested in this poorly performing enterprise is now invested somewhere else, so everyone is better off.
These things really have to be considered. Imagine a gym in an extended decline. Its locations and machines will not get enough maintenance, and will lose value faster, thus losing more customers sooner too, which will make extend-and-pretend yield even worse results. Better fail quickly or find management that can turn things around.
I am not saying a company should continue past profitability, but huge amounts of debt shift the line and kill off many salvageable companies while destroying a great deal of wealth.
One of the reasons why they get loans so easily is because these are asset-heavy investments minimizing the downside risk for the banks. As there are usually plenty of real estate and inventory to get at least some of the money back during bankruptcy. Which is why we see it so often in the big-box retail space.
There are plenty of investors who would lose out as Toys-R-US dies a slow death as well. Instead they were bought out earlier in the process at a relatively decent rate and the risk is shifting from the public market to the banks and private equity firms.
I'm not a big fan of these financial-market gambles and obsession with high-growth industry as the only viable model, but there was voluntary sales by the original owners/investors, as they saw it as the best ROI at the time vs a fragile future.
And as this company fails, that still means there is a market not being tapped for retail toy sales and smaller firms can come in to provide that value/jobs, at a size and business model better suited for the nature of the current market. Or other firms can absorb it such as Walmart by expanding their own offerings.
If the company had successfully paid back the loans then they would not have failed, but often when that happens private equity simply takes out more loans until the company fails. In such cases failure is both profitable and by design because they effectively sell the company to banks for more than it's worth while profiting from the difference.
This is incorrect.
"PE-backed firms are no more likely to default than other firms with similar leverage. Distressed PE-backed firms restructure more out of court, restructure faster, and are more likely to remain an independent going concern following the restructuring, compared to leveraged borrowers that are not PE-backed...Hence, PE investors do not exacerbate the likelihood of financial distress and seem to resolve distress more efficiently than other firms."
Furthermore, "companies that were previously owned by a PE fund that [have] exited within the last five years have nearly a 50% lower default probability than other firms in the sample, including non PE-backed firms with no history of PE ownership. Consistent with the findings in Harford and Kolasinski (forthcoming), this result suggests that PE firms leave their portfolio companies in relatively strong financial shape when they exit."
All in all, PE-backed companies default about 5% of the time versus 3% for population (Table 2).
http://portal.idc.ac.il/en/schools/economics/about/documents...
As to over leveraged, the most attractive targets for PE is when the companies assets are worth more than their stock. That's the opposite of being highly leveraged. Remember, profit and assets are two very different things and a company can lose money while still having a lot of capital.
The hypothetical buggy whip manufacturer sometimes survive at 1/100th the size and or grow in other directions.
We got 14 years out of full Toys R Us experience out of this, and the writing on the wall should have been clear in 2004; how many failing retail giants had a good long term outcome from this type of buyout?