> A slowly dying company is still successfully serving some customers and employing people.

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.

This particular company was strategic as it served as a competitive counterbalance to discounters and online stores.

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.

A counterbalancing opinion:

"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-...

Anybody who has ever forgotten your child's friend's birthday laments the loss of Toys R Us. Upon the closure announcement, I immediately added Picolo Mondo to Waze.

No doubt true, but the number of those stores has declined over time. My guess is you’ll see vertically integrated stores from LEGO and other brands pop up.

Small comfort if you're selling large toys that small shops don't have the floor space to stock.

No, it's not. "Profits" are after money sent to vendors and employees, who are profiting. Only shareholders are losing in an unprofitable company.

Vendors and employees are presumably receiving a fair market value for their services; in a competitive market one buyer more or less won't make a significant difference.

I don't think the toy store market is that competitive right now. Vendors can try to get into a big box stores small selection, but for large toys they are mostly stuck online only.

Well if Toys R Us were operating at unsustainable cash-burn, it's not surprising that functional businesses weren't able to compete. With them gone, the market opens up for toy stores that charge enough to pay their overheads and operate as viable businesses. (Or maybe customers simply aren't willing to pay the premium that that costs compared to online, because they don't get that much value out of physical stores).

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.

> 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.

Are you sure about that? When big box stores fail they often sit empty for years causing blight in the area.

> When big box stores fail they often sit empty for years causing blight in the area

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...

I'd wager that has more to do with bankruptcy than with the markets inability to repurpose those assets. Additionally, if the reason they failed is because of a drop in foot traffic in the area, then it makes sense they aren't easily repurposed.

Regardless, the capital that would otherwise be invested in this poorly performing enterprise is now invested somewhere else, so everyone is better off.

luckly in europe most store's will directly go to the irish "smyths toys"

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.

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.

> 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.

Yeah, there's a lot of availability heuristic, where you can easily see and recall the multi-billion dollar behemoth that exists today, but you can't see what it is preventing from existing by the resources it consumes. Just because Toys R Us was big and maybe you have some fond memories of it doesn't mean that it needs to exist. You can also see and easily bring to mind the acute pain of Toys R Us collapsing but tend to discount the ongoing low-level pain of slow death and stagnation.

So, you (and the author of this article) are complaining both about the people lending money losing out, and also complaining that Bain et al spent too much money paying the loans back?

No. I am complaining that the company needs to generate profit to pay back loans, and the size of profit generated is insufficient to pay interest on these loans.

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.

> when that happens private equity simply takes out more loans until the company fails

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...

compared to leveraged borrowers is hardly a reasonable comparison as as toys r US did not fall into that category before the buyout.

Un-leveraged companies don't need to restructure; the comparison is apt for the question which is asked. In any case, your claim that most PE-backed companies fail is patently false.

I did not say most PE companies fail, just that 'often' aka one pattern for PE is to over leverage as a risk mitigation strategy. Every dollar they pull out is a dollar they keep independent of how much the company tanks.

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.

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.

How long do you think Toys R Us would have taken to die a slow death? How many customers would they manage to serve, and how many employees would they manage to employ during that time?

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?

'often' is not most. I was simply referring to a frequent pattern not the only one.