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Related: About this forumBernie with Toys R Us workers: company was making profit but private equity debt killed it
Toys R Us was making a substantial profit, but went bankrupt paying back the leveraged buyout crowd on Wall St. that had bought them.
When someone says "capitalism" is broken, they mean more this kind of financial gaming of the system than people's willingness to take risks to come up with a new or better product or service or workers to put in a fair day's work for fair pay.
The problem is, the guys who do stuff like this buy politicians, mostly in both parties, to make this shit legal.
They should be subject to the rule of law like the rest of us not making the laws that make their crimes legal.
Link to tweet
CurtEastPoint
(18,639 posts)Wellstone ruled
(34,661 posts)Just like Bon Tom and its associated Retail Names. All by design.
yurbud
(39,405 posts)Democrats need to shut them and those like them down.
InAbLuEsTaTe
(24,122 posts)and other Democrats will join him in denouncing these greedy Vulture Capitalists.
mountain grammy
(26,619 posts)unblock
(52,203 posts)essentially, the new owners are able to make a potentially hugely profitable gamble with a rather limited downside.
maybe risk $10 million for a potential upside of $100 million. if losses go beyond that, the owners are protected, it's the creditors who take the real hit (and the employees and the customers and the suppliers)
and for their role in enabling this, dealmakers extract as much cash as quickly as possible before it collapses, increasing their profit while lowering their risk, all the while making the eventual failure of the business more likely.
personally, i can't leverage my investments by more than about 2 to 1 via margin, a bit more if i want to gamble with futures. why are businesses able to gamble with ratios like 10 to 1 or more with so much at stake?
BeyondGeography
(39,369 posts)And no severance for employees:
https://mobile.nytimes.com/2018/05/11/business/toys-r-us-bankruptcy.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business®ion=stream&module=stream_unit&version=latest&contentPlacement=4&pgtype=sectionfront
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unblock
(52,203 posts)in theory, it's only the unprofitable businesses that actually liquidate.
if a business is profitable but took on too much debt, usually it's in everyone's best interests to keep the business going.
creditors take a loss, often in exchange for some equity piece, if not total ownership, but if the business is profitable, why not keep it going?
i have to think that if it was, at the moment profitable, the creditors believed that it could not remain so, given competition from amazon in particular.
fwiw, i will note that toys r us canada is staying open and is profitable.
BeyondGeography
(39,369 posts)With cash tight, the company wanted last spring to take some of the pressure off by refinancing about $200 million of its total $5 billion in debt. But when word got out that Toys R Us had hired restructuring advisers, the companys vendors were spooked heading into the crucial Christmas season.
By September, Toys R Us said it had no choice but to file for bankruptcy.
The company had originally hoped to shed some of its debt and keep operating. But after dismal holiday sales, the Toys R Us lenders began to question whether the company had a future and threatened to pull back on financing.
Any sign of difficulty for brick-and-mortar retailers in the current environment is a death knell. Refinancing 4% of your total debt shouldnt have led to this outcome.
yurbud
(39,405 posts)Does it really make economic sense to just look at quarterly profits and stock price to make business decisions or does that lead bookkeeping tricks to goose the numbers?
unblock
(52,203 posts)well, that's not entirely true, because not every business decision is a correct one in the objective sense, especially when multiple parties are involved. maybe the creditors should have reached an agreement that would have kept the business open, but one greedy holdout refused to go along, maybe just because they wanted a better deal for themselves.
a variant of the prisoner's dilemma. you can't always get the optimal group result because individuals sometimes try for a better individual result, dooming the group's deal.
in any event, my guess is that toys r us didn't have much of a future anyway. maybe they could have dragged it out two or three more years, but there's too much too easy too cheap on line these days.
there's value to being able to browse through a brick and mortar story and to ask question face-to-face, but amazon was reaping a lot of that benefit for free as people browse at toys r us and then order online for less.
yurbud
(39,405 posts)If I'm buying something for myself, I can wait a day or three for the Amazon package to show up.
If my wife or I procrastinated about a present for someone else's kid, we gotta buy it in person.
SWBTATTReg
(22,113 posts)so upper management and debt capital/money mgmt. failed also. However, the benefits all went to the refinance persons who pretty tailored the entire refinance pkg. solely to their benefit, that would still led to this company unable to still make its debt payments...I think they deliberately did this so they could sell parts of the insolvent company. Why did upper mgmt. do this? Seems kind of dumb, and I can see lots of lawsuits waiting to happen being that I don't think upper mgmt. had shareholders in mind or the employees...
I am sorry to see this whole group of workers get impacted so negatively...I thought there were safeguards in place that protected pensions and so forth in the events that companies like this go under...
yurbud
(39,405 posts)I especially hate to see this with news "papers" that still turn a profit but get tossed around from trust fund baby to oil sheik to strip mined for assets when it could still be providing a valuable community service.
Hoyt
(54,770 posts)If anything, the purchase extended the life of Toys R Us a little while, rather than causing the downfall.
More often than not, companies turn to private equity much like individuals go to loan sharks. They need money, but banks, etc., won't lend it to them on decent terms. Private equity likely makes it uglier than it needs to be.
Point is, writing was on the wall in 2005. And the internet killed them off even faster than what would have happened otherwise. They would have failed, with or without private equity. Definitely a shame, but such are the times.