How vulture capitalists ate Toys 'R' Us • Hacker News Board

Re: How vulture capitalists ate Toys 'R' Us

#11

Post by harryh » Mon, Apr 23, 2018, 4:40 PM UTC

Disillusioned9 wrote: post #6

JumpCrisscross wrote: post #2

> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut sho…

Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.

limited downsides

It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.

Re: How vulture capitalists ate Toys 'R' Us

#12

Post by JumpCrisscross » Mon, Apr 23, 2018, 4:40 PM UTC

Disillusioned9 wrote: post #6

JumpCrisscross wrote: post #2

> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut sho…

Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.

> [Private equity] get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers.

Private equity paid the original shareholders for Toys 'R' Us. The limited partners in this fund (and creditors) lost a lot. The managers extracted their management fee, but that's basically only salaries. Good salaries, but none of the 20% of the upside that makes people in PE rich.

I agree that workers are left out. Employees in private-equity acquired companies should get (a) stock (or better yet, an interest in the diversified fund) and/or (b) enhanced downside protection (e.g. longer or bigger unemployment benefits, paid for by the private equity fund). But in this specific case, employees didn't turn out that much more badly than they would have otherwise. (For those who might have lost their jobs in the next recession, their lot was arguably improved.)

Re: How vulture capitalists ate Toys 'R' Us

#13

Post by dmix » Mon, Apr 23, 2018, 4:42 PM UTC

Retric wrote: post #7

JumpCrisscross wrote: post #2

> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut sho…

A slowly dying company is still successfully serving some customers and employing people. So, early failure really is worse for both society and the companies workers. Further, leveraged buyouts are funded with loans, those lending money also lose out.

> Further, leveraged buyouts are funded with loans, those lending money also lose out.

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.

Re: How vulture capitalists ate Toys 'R' Us

#14

Post by JumpCrisscross » Mon, Apr 23, 2018, 4:45 PM UTC

Retric wrote: post #7

JumpCrisscross wrote: post #2

> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut sho…

A slowly dying company is still successfully serving some customers and employing people. So, early failure really is worse for both society and the companies workers. Further, leveraged buyouts are funded with loans, those lending money also lose out.

> early failure really is worse for both society and the companies workers

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.

Re: How vulture capitalists ate Toys 'R' Us

#15

Post by cryptonector » Mon, Apr 23, 2018, 4:46 PM UTC

Retric wrote: post #7

JumpCrisscross wrote: post #2

> if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut sho…

A slowly dying company is still successfully serving some customers and employing people. So, early failure really is worse for both society and the companies workers. Further, leveraged buyouts are funded with loans, those lending money also lose out.

Not really. There is tremendous opportunity cost involved in continued malinvestment. Those employees could have better jobs with better future promotion and pay raise prospects. Those customers might be better served by someone else. Those creditors will lose less money if they don't extend-and-pretend. Others who could be using the failed company's resources instead (especially if acquired at fire-sale prices) will have to wait if the company fails slowly.

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.

Re: How vulture capitalists ate Toys 'R' Us

#16

Post by kelleoeo » Mon, Apr 23, 2018, 4:47 PM UTC

harryh wrote: post #11

Disillusioned9 wrote: post #6

Earlier quoted context omitted.

Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.

limited downsides It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.

Rich people losing a fraction of their wealth and who will rebound thanks to business networking effects, and be given a pass because sometimes that’s how it goes

Limited downside seems accurate

Re: How vulture capitalists ate Toys 'R' Us

#17

Post by Retric » Mon, Apr 23, 2018, 4:48 PM UTC

dnautics wrote: post #10

Retric wrote: post #7

Earlier quoted context omitted.

A slowly dying company is still successfully serving some customers and employing people. So, early failure really is worse for both society and the companies workers. Further, leveraged buyouts are funded with loans, those lending money also lose out.

That's a really presumptuous position that employment at all cost is a positive for society and essentially is the fallacy of the seen and the unseen.

What costs? Many companies slowly wind down, selling off assets and laying people off as individual pieces stop being profitable.

The hypothetical buggy whip manufacturer sometimes survive at 1/100th the size and or grow in other directions.

Re: How vulture capitalists ate Toys 'R' Us

#18

Post by btilly » Mon, Apr 23, 2018, 4:50 PM UTC

JumpCrisscross wrote: post #12

Disillusioned9 wrote: post #6

Earlier quoted context omitted.

Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.

> [Private equity] get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. Private equity paid the original shareholders for Toys 'R' Us. The limited partners in this fund (and creditors) lost a lot. The managers extracted their management fee, but that's basically only salaries. Good salaries, but none of the 20% of the upside that mak…

The managers extracted their management fee, but that's basically only salaries.

Management fees in this case were $200 million. That's a pretty nice salary!

Re: How vulture capitalists ate Toys 'R' Us

#19

Post by JumpCrisscross » Mon, Apr 23, 2018, 4:51 PM UTC

btilly wrote: post #18

JumpCrisscross wrote: post #12

Earlier quoted context omitted.

> [Private equity] get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. Private equity paid the original shareholders for Toys 'R' Us. The limited partners in this fund (and creditors) lost a lot. The managers extracted their management fee, but that's basically only salaries. Good salaries, but none of the 20% of the upside that mak…

The managers extracted their management fee, but that's basically only salaries. Management fees in this case were $200 million. That's a pretty nice salary!

> Management fees in this case were $200 million

"Toys 'R' Us does say in its SEC filings that $47 million in transaction fees that it owed KKR, Bain and Vornado, have been waived. The advisory fees were also voluntarily reduced by the investment firms in recent years" [1].

(Toys 'R' Us did pay the PE consortium "$470 million in fees and interest" [2], but the vast bulk of that goes to the fund, i.e. the people who just lost a billion dollars.)

[1] https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-...

[2] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...

Re: How vulture capitalists ate Toys 'R' Us

#20

Post by Retric » Mon, Apr 23, 2018, 4:51 PM UTC

cryptonector wrote: post #15

Retric wrote: post #7

Earlier quoted context omitted.

A slowly dying company is still successfully serving some customers and employing people. So, early failure really is worse for both society and the companies workers. Further, leveraged buyouts are funded with loans, those lending money also lose out.

Not really. There is tremendous opportunity cost involved in continued malinvestment. Those employees could have better jobs with better future promotion and pay raise prospects. Those customers might be better served by someone else. Those creditors will lose less money if they don't extend-and-pretend. Others who could be using the failed company's resources instead (especially if acquired at fire-sale prices) will…

Depends on the cause of failure. When long hair became fashionable in the 60's a lot of barber ships closed down, but the demand never hit zero. A company in that situation with 100 locations might scale down to 10 locations without ever losing money as the industry collapsed and consolidated.

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.