This is capitalism at its worst.
Corporate raiders were the final straw that ended Toys “R” Us. Bain Capital was founded in 1984 by Bain & Company partners Mitt Romney, T. Coleman Andrews III, and Eric Kriss, after Bill Bain had offered Romney the chance to head a new venture that would invest in companies and apply Bain’s consulting techniques to improve operations. Those techniques destroyed companies but made Bain a success for its owners.
The Toys “R” Us collapse is not a new phenomenon. It has made buyers of companies rich and destroyed the target company. Blame the private equity firms Bain and Company, KKR & Co. L.P. and Vornado Realty Trust for the bankruptcy. Toys “R” Us was taken private by KKR, Bain and Company, and Vornado in 2005, it took on a lot of debt, leaving the company with repayments that have crippled it in a period of declining sales.
A leveraged buyout, commonly referred to as an LBO, is a transaction that companies use to acquire other businesses. The buyout involves a combination of equity from the buyer, along with debt that is secured by the target company’s assets. The deal is structured so that the target company’s assets and cash flows are used to pay for most of the financing cost. The main disadvantage of this financing is that, once the deal is completed, the target business is very leveraged. This scenario allows for little margin of error. A problem with liquidity, such as the loss of a few key customers, could put the business in serious distress.
Rolling Stone magazine reports that of the 25 companies that private equity firms bought in the 1980s that borrowed more than $1million in junk bonds, half went bankrupt.
Do you remember Mervyn’s department stores? It was an American middle-scale department store chain based in Hayward, California, and founded by Mervin G. Morris. It carried national brands of clothing, footwear, bedding, furniture, jewelry, beauty products, electronics, and housewares. Mervin G. Morris founded the first Mervyn’s store in San Lorenzo, California on July 29, 1949. By 1978 the company had grown to a chain of more than 50 stores in three states,[7] and Mervyn’s was acquired by the Dayton Hudson Corporation (now Target Corporation). Mervyn’s kept its separate identity as a Dayton Hudson subsidiary. In September 2008, Mervyn’s sued the private equity firms involved in the leveraged buyout of the chain, alleging that the deal had stripped the retailer of its real estate assets, forcing it into bankruptcy. Mervyn’s said in the suit that Cerberus Capital Management and its partners had used the increased rent to finance the buyout.
31,000 Toys ‘R’ Us employees: No job and no severance
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