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.
It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.
Limited downside seems accurate
You have to be careful when you get vindictive at rich people; they're also the employers, and it's hard to build a system where such people aren't "the rich".
(If you hard-core leveled everyone in the world to equal wealth, nobody would be able to employ anybody else in the current sense of the term. People would have to pool their money and give it to somebody or set of somebodies to manage. And lo, watch "the rich" appear again as the people who successfully employ others get a return, and those who fail do not. It's really hard to avoid "the rich" also being "the employers".)
I can pretty much guarantee someone, probably multiple someones, were called on the carpet at these firms, and did not get the "Oh well, just try again good buddy!" treatment.
I can't speak for the person you replied to, but how about this? Less downside for the workers. We're talking about thousands of people losing their jobs. These people then go into a smaller labour market where they compete with other vulnerable retail workers, affecting far more people.
If we want an appropriate measure of downside in a situation like this, we should look at all of the externalities. Few people ever do, though, and society marches on.
Expand your time horizon a bit. Having freed up the malinvested resources, other enterprises will arise which will hire them, at jobs that are now almost by definition more solid than the one they left behind, since the one they left behind couldn't sustain itself.
"But what if they can't wait around?" They don't necessarily have to. The job market is not so tight that one job has to instantly open up as soon as one person is fired. There is some fluidity in it. The only place there will be any particular trouble would be around the HQ of Toys R Us; the individual stores are going to be in economies where the store going out of business is just a tiny blip hardly affecting the local retail employment environment.
"But what about the permanently unemployed?" Well, if you're used to the "new normal", be sure to have a look at the current unemployment trends before getting too far into that sort of argument.
And you have to consider the flip side as well. What if you got to go to work for Toys R Us, and it was guaranteed that you would be employed indefinitely there no matter how badly things went for Toys R Us? Sweet deal, right? Well, sure, but it's not going to be unique to Toys R Us, right? It's going to be the deal for everybody. We've got experience with what that "sweet deal" produces; read about the Soviet Union's economy. Would you rather have to find a new job every so often and live in the US, or be stuck in the Soviet Union? We don't have to hypothesize the answer to that; people are still falling over themselves to get into the US.
It is vital that people understand that creative destruction trades some short-term inconvenience for massive long term wins, lest we foolishly legislate short-term conveniences for massive long-term losses because we collectively stopped understanding the full story.
Continue piling onto the stash already very wealthy people have is primarily all this economic activity is accomplishing now as they crater retirements, cut healthcare or inflate prices out of the reach of the majority (which globally ~80% lives on ~2.50/day.)
What’s the point of 40-50+ hrs a week for me now if some whithered old geezer can change a law and flush the effort down the drain
How about meet basic utilitarian needs of food and healthcare, common ones of all humans, in the domain of the government
And what we spend on time on otherwise is up to us. Let’s all punch a clock to make earrings and baubles to support the ephemeral economy? Why does one need to be compelled to make consumer garbage? Oh cause stock prices or we can’t anger a small portion of the population: rich people
They have no divine right to wealth you know?
It’s self eating shitshow of stupid ideas that reinforce stupid ideas.
Steve Jobs is right: none of the rich are any smarter or more capable than your avg college grad. They just got lucky sooner
It sucks, and there’s nothing you or I can do about it ... but pretending that this is actually a good thing for anyone but a handful of rich guys who will have made out like bandits on the whole debacle is just fantasy.
The main thing is that just I hate that otherwise smart people find it so easy to "other" a big group of people and find ways to back their belief that ultimately this groups suffering is just and good. It's not. As I said, maybe we can't do anything about it ... but the least we can do is not be so fucking smug about it.
Rant over.
You're missing the big picture. People in e.g. China are better off now because they are enjoying the upside from wage growth. Americans enjoyed this in the 1950s, but the ensuing globalization meant the improvement in wages would go to the lowest paid workers. In theory, once developing nations reach the same minimum wage as the U.S., American workers will start reaping the rewards of increased wages. In the meantime, Americans can pat themselves on the back for having a strong currency, cheap products made with cheap Asian labor, a great justice system, and employment and education opportunities galore.
The globalization genie is out of the bottle. It's not a matter of being able to afford to think the country as a big system -- you're the one who's myopically looking at it from the perspective of a cherry-picked subset of workers.
Americans can either wait until the developing nations catch up or they can invest in education (and write legislation) to bring more workers into the 21st century. Swimming against the tide of globalization is akin to fighting the Industrial Revolution -- I suggest giving up on that idea.
Capitalism have built assumptions to its origins that protect capital holder: divine right was often used in the era of its origin
The US Constitution considered landowners above others due to them contemporary belief of divine rights
Our contemporary system is built upon historical record
There’s historical record that plainly shows humans deciding to write a law this way because it favors company X or ideology Y
There’s plain historical record that shows obstructionism to social evolution in favor of entrenched players
And scholars and academics measure THOSE results
So your argument is based upon built in bullshit
Economists have been PAID to peddle bullshit, corrupting their facts
My god I can’t even. Is this really what they teach in college now? Economics and physics are one and the same despite a ... there are decades of government documents detailing their collusion and manipulation of invention and investment for the benefit of power players
But yeah our contemporary economy is a greenfield implementation lol
And sure, it's weird to contrast a theory of firm destruction being necessary for a vibrant economy with the reality of individuals you can point to losing their jobs but the fact remains that doesn't really distract from the truth of my statements. Just because it's a bit harder to point at specific individuals who will benefit from the demise of Toys R Us doesn't mean the link isn't real.
...which is still lower than it's been since 1986 [1], and is significantly lower than Australia, Japan, Britain, Canada, Germany, France, and Sweden [2].
[1]: https://data.bls.gov/pdq/SurveyOutputServlet (set from to 1948 and click "Go")
[2]: https://www.motherjones.com/kevin-drum/2017/12/raw-data-the-...
Amazon is a lot more profitable than Toys R Us ever was but that doesn't mean they make the job market, let alone society, healthier.
So in essence they are no worse off than if it didn't happen.
Physics and economics are not one and the same.
Ownership is not divine and should be treated as such.
Paulo Freire and others are better at explaining the reality.
This forum is a wasteland of neoliberal babies who want to build a giant castle to their egos and live in it.
Grow up a bit. Be less ignorant of history and stop fetishizing economic output.
If we have to motivate the species so hard to produce, perhaps economy is inherent to our biology.
But next quarter growth or bust!
Clueless rubes
https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
https://www.marketplace.org/2018/03/06/business/toys-r-us-an...
"The private equity firms’ investors haven’t made money off this deal. But the firms themselves have. It’s unclear where Vornado ended up. But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 million."
[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
$270M over 13 years from $1.1B in loans? ($270M = $470M - the $200M in fees.) That seems incredibly low interest. I am suspicious. LBO firms do not give low interest loans to their targets.
If we assume an interest rate of 5%, you get 50M in interest a year on 1B. 13 years will yeild $750M in interest.
Did these LBO firms really offer loads at something like 1.5%?
Something isn't adding up.
They hold less than 20% of the debt. Most of their investment went in as equity. That's wiped out.
> LBO firms do not give low interest loans to their targets
PE buys equity and subordinated debt. Sub debt has high rates and wonky structures. In this case, I believe it was pay in kind, "a type of high-risk loan or bond that allows borrowers to pay interest with additional debt rather than cash" [1]. Nice feature if the debt is repaid. Less fun when it's wiped out.
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.)
Management fees in this case were $200 million. That's a pretty nice salary!
"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-...
>Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership.
TL; DR Nobody on the Toys 'R' Us deal teams at these firms is happy about this, and all will find their lives in the industry a little bit harder going forward.
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?
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 short.