The Toys R Us Tragedy: How it All Begins
In 2005, Toys R Us was a well-loved and profitable enterprise. Then came the private equity firms: Bain Capital, KKR & Co., and Vornado Realty Trust. For an eye-popping $6.6 billion, they “rescued” the toy retailer from the perceived nadir of the public market. This rescue led, rather tragically, to bankruptcy followed by full-blown liquidation a mere 13 years later.
Pulling the Strings: The Debt-Fueled Downfall
Private equity’s modus operandi is hardly subtle: load a profitable company with the debt incurred from its own buyout, strip assets for short-term gain, and then pray that the business can still hobble its way to profitability. It’s like asking a racehorse to win the Kentucky Derby while dragging a wagon full of gold bricks.
In Toys R Us case, they were saddled with $5 billion in debt – annual interest payments alone amounted to over $400 million. As profits faltered, more of its earnings were siphoned off to service this monumental debt, leaving a skeleton crew and penny-pinching initiatives in its wake.
A Walk Through a Ghost Store
On the ground, the story was all too predictable. Overworked and underpaid employees struggled to keep up with inventory and provide decent customer service. Stores grew shabby while online competitors, not kneeling to an Everest of debt, upped the ante. Burdened by its financial albatross, Toys R Us stood no chance.
Don’t Just Blame Amazon
It’s easy to point fingers at Amazon and e-commerce as the villains. Sure, they posed fierce competition, but it’s important to remember that the crippling debt and continual extraction of wealth were inflicted by the PE firms who rode in, ironically, as saviors.
The Bed Bath & Beyond Debacle: A Deja Vu
Here’s where we warn you that this isn’t a stand-alone horror story. No, countless other companies stand in the wake of private equity’s plunder. Take Bed Bath & Beyond, another well-known victim. Purchased by three PE firms in 2019, the company’s fate already seems sealed. The playbook remains the same – it’s only the victims that change.
What’s the Takeaway?
The crux of the issue is this: Private equity has morphed into an industry obsessed with financial engineering rather than business building. Targets are chosen not to grow and generate profits, but to loot and leave ravaged. Profits are reaped while the company, its workers and often its customers pay the price.
Despite these predictable patterns of destruction, private equity’s allure remains strong, consistently burnished by a Wall Street narrative that turns leveraged buyouts into stories of value creation. It’s high time for a more piercing, unvarnished look at how this industry operates. Because the playbook may never change, but the victims do – and they deserve better than being the next Toys R Us.