What poor timing, oh well he had a great life and great accomplishments during his prime.
> saddled with more than $5 billion in debt
Wow, I haven't yet followed the story of Toys R Us but that is a huge amount of debt. I can't imagine what severe mismanagement happened at the company to allow this. Must have had some ex-government workers managing finances (/s)...
> Since Lazarus stepped down as chief executive officer in 1994
Ah, so it was well after he left. It's sad to see your creation falter but it wasn't his baby anymore. Many great companies end up failing after their original founders leave. I'd be curious to read more about how they messed it up so badly.
Two words: leveraged buyout. I'm not sure what purpose they serve other than to create debt.
Working at a company that was acquired by a smaller fish with a $4 billion loan, it made things painful when cuts were constantly made to pay interest on debt.
Somehow, the situation benefited the shareholders that signed off on the deal.
Well yeah, it's pretty straightforward. Company A borrows $4 billion; it's leveraged against the company they're going to buy; they buy Company B, paying out the shareholders, and B merges into A and keeps the debt.
I'm having a struggle with whether this seems moral or not. B is saddled with a big debt, and employees of company B may suffer as a result of this (anything from losing bonuses or profit sharing opportunities, to losing headcount, or having the very future of the company put into question). The new owners also have to live with this situation, while the old owners skip merrily away with their profits gleaned from the future work that will be done to pay down the loan.
This seems negative, but has to be balanced with the fact that the shareholders of company B are the owners of the company, and it is their decision to do as they wish; if they're offered a certain sum for their shares, it's their choice to take it. It's unfortunate that this comes with blindness to the future impact of that action, but this may be a necessary or at least presently contingent artifact of capitalism.
The morality of it depends on what you believe owners owe employees. There's clearly no objective basis there, it's down to a given person's moral beliefs. In my observation, you'll get a very different response to that from one business owner to the next. Some owners/operators take it as an intense matter of morality to safeguard their employees, others could care less and believe they owe their employees between nothing and very little.
If you look at the top dozen economies in terms of prosperity or economic growth, you'll find a lot of different cultural approaches to that owner/operator-worker relationship, and they all have managed to generate rather spectacular results. France, US, Germany, South Korea, Japan, China, Sweden, Switzerland, Australia, Denmark - all have between slightly and very different approaches.
It also takes you down a road of other similar questions.
Joe loads up on his credit cards and puts his family at risk. Should that be illegal? Is it immoral? (arguably it's immoral)
Social contracts are a fascinating thing and they're essentially all-pervasive across everything people do. We go out and drive on the roads with a sort of social contract, that properly we're not going to act like maniacs and endanger each other.
The difference here is that it's the acquired company that owes the debt, as opposed to the acquiring company owing a debt with the acquired company as collateral.
Bain Capital decides to acquire Toys-R-Us so they set-up NewToyCo and invest $5B in it.
NewToyCo buys Toys-R-Us with that $5B and installs new managers at Toys-R-Us. Since the invested cash was investment and not a loan, NewToyCo owns Toys-R-Us free and clear
The new managers of Toys-R-Us get a $5B loan from banks secured by the assets of Toys-R-Us and pay a one time $5B dividend to shareholders of NewToyCo.
If everything goes well and Toys-R-Us can service the loan, Bain owns Toys-R-Us for free and sells it or takes it public. If things don't work out, they collected huge management consulting fees for s few years. Bain ran this exact same play on KB Toys with the same (bankruptcy) result.
It's just like a mortgage. Even though it's you buying the house, it's in a way the house that ends up owning the mortgage (in many jurisdictions, you can walk away from the house and mortgage, and the bank had no leverage against your person, they can only repossess the house).
I was trying to explain what a leveraged buyout was and why a company like Toys R Us had so much debt on its books. After trying to talk through it, I used the mortgage analogy and it made a lot more sense.
*Obvious simplification is obvious. The risk is they can't keep acquirred company alive long enough to extract a profit before the husk of a company finally implodes.
Unless the acquired company is obviously healthy enough to service the debt through to maturity, or the bank is really stupid, the acquiring company has to put up non-trivial collateral.
Or put another way, if the acquiring company has no risk, then the bank putting up the leverage has it. The risk doesn't just disappear.
There was very little risk for the acquiring company or banks who loaned the money. Bain partnered with the real estate company Vornado Realty Trust in the Toys-R-Us deal. The bank loans were secured by Toys-R-Us assets that will be auctioned off, and Vornado will re-develop the land that Toys-R-Us stores sit on - everybody wins. Except for the 30,000 Toys-R-Us employees of course.
If you can buy a company with the sum of money you can raise by mortgaging the real estate it occupies, the implication is that the company is worth less than this real estate. Considering the kind of real estate Toys-R-Us shops occupied, this is not a good look for them, nor does it speak well for the employees' prospects had the LBO not happened.
The US used to have these businesses called drive-in movies. You could pack your car full of friends and snacks, then pick a spot in a grass field where you had a picnic while watching a movie. The value of the real-estate these businesses sat on far exceeded the return of operating the drive-in, so drive-ins no longer exists within an hour drive of most people. The US is poorer for no longer having these staples of 1950's and 1960's culture.
Similarly, Toys-r-Us was part of the US culture and has been destroyed for a few million in profit because it made economic sense. Hardware stores and book stores will also disappear from our culture, is this the society we want? People band together to support opera and symphonies, I would rather save drive-ins and hardware stores since they are more important in almost everyone's lives.
That's a rose-tinted view of things. There's plenty of dirt-cheap land just outside all but the biggest American towns, but no drive-ins on them. Seriously, without knowing you, chances are you and a couple of friends could pool your savings and buy a plot and setup a drive-in theatre. But chances are you'd fail. Land increasing in value is far from the only thing that changed that affected drive-ins. A car (and especially the sound options in one) is far from an ideal place to enjoy a movie from, streaming (or before that, renting a video or just watching on broadcast TV) on a large colour TV is much, much better. Modern, multiplex theatres provide a technically far, far superior experience to either. Attitudes to pre-marital sex have decreased the value of having somewhere to legitimately park in the dark for an extended period.
Many analogous things are true for toy stores and hardware stores etc. And people are banding together to support things that aren't commercially viable, the closest thing to hardware stores in this regard is probably hacker spaces.
And to answer your question directly, yes, I strongly prefer to live in a society where businesses are allowed to fail when they've run their course rather than being kept on life-support for vague past-romantic reasons.
You are probably right about drive-ins, and if I like them so much I should create a non-profit, co-op one.
I completely agree non-viable businesses should fail just like we let insolvent banks and automakers...well those were an exception.
It comes down to what our core beliefs are as a society. If we want to maximize private profit, why aren't there slot machines and cigarette vending machines at every bus stop? Toys-R-Us was a viable business that was destroyed for a relatively small profit - should that behavior be: illegal, discouraged by taxes, or encouraged with government backed loans? Those are the kinds of questions we could be asking. Our current regulatory environment is not the same as what it was in the past or what it will be in the future.
But is there risk when using the company as collateral? Isn't that the point of collateral? Or do they still have to put up the difference between the current value of the company and the debt?
Well, to be fair, leveraged buyouts can be a useful tool to take over a company when there is a bad management team or an opportunity to generate a synergy when it is bought by another player in the same segment. For example this was recently the case with Dell and Hilton.
But generally the high amount of leverage implies aggressive cost cutting, which negatively impacts the employees and in some cases R&D, which in turn means risking the future sustainability of the company for short term profits.
If you're interested in the topic, "Barbarians at the Gate" is a great book to understand the in and outs of LBO's. The writing style also makes it fun to read.
well actually the heavy debt based corporate actions can really hurt share holders if as often happens it goes pear shaped and the share holders get 90% wiped out by the bond holders
The ones who win are the corporate finance companies who make $ by arranging these complex financial instruments.
Debt is cheaper than equity. The purchaser isn't diluting their equity returns as much so in theory they're getting a higher return. Interest is usually slightly higher than usual corporate lending so banks win. The profits should be more positive so the purchasee employees should be better off.
So a LBO is a generally good idea other than its much more complicated and only scales to large purchases (like a nationwide toy store, perhaps)
The effect you're probably confusing with the cause, is a deal thats dead, zero-sum or worse, with a pure equity structure might barely flip slightly positive if you do some financial alchemy and run it as a LBO... however thats exactly the kind of situation thats highly likely to crash and burn, no matter what you do. Essentially you get to try doing nothing and go out of business two years ago, do a pure equity deal and go out of business last year, or do a LBO and go out of business this year, or maybe, possibly, LBO has the best chance of making it.
Its a common pattern often seen in military or business argument, a small scale tactic that maximizes success (minimalizes failure, I guess) when in retreat somehow gets blamed as the sole cause of the entire retreat itself. Smoke grenades screen a retreat better than clear air, therefore the war was lost or maybe a bad idea to start because we tossed smoke, well, it doesn't really work that way.
In a very wide sense you are sort of correct that a deal or a company thats only microscopically barely alive by using every trick in the book including LBOs is correctly perceived as a dead company walking; just remember that almost all companies that successfully LBO are never talked about, therefore in a weird survivorship bias like scenario the general public will never hear about LBOs except in the case of a dead company. A good analogy would be lots of people who die immediately spent some time in a ICU, therefore there seems no purpose to ICUs other than death. However, many/most people only spend a little while in ICU and then recover but you'll never hear about it, they'll just call it post op recovery or critical care or some similar euphemism.
Another weird medical analogy is doctors play an odds game. If the medical advice is the lowest risk treatment X is 90% success and 10% fatal, one patient dying doesn't disprove that advice, especially if 9 or more live, also you're only likely to hear about the fatalities which causes a false belief that docs are always wrong.
You have to pay interest on a debt, not so with equity. I am having a hard time relating your military and medical analogies to Bain/Vornado buying Toys-R-Us and then saddling it with $Bs in debt.
Its a finance thing. You will expect a greater rate of return from equity because its more risk than debt. For example a company is worth $10 $5 equity and $5 dollars debt. If company value goes to $20 the value of equity has tripled, but debt is still worth $5. However if company value goes to $5 well equity goes to 0, but debt is still worth $5. Since you are taking more risk with equity you need a greater rate of return on equity. So when equity is priced it needs to have a better return than debt for the added risk.
>I'd be curious to read more about how they messed it up so badly.
They failed to embrace online, that was their downfall. They didn't take it seriously, opting to let someone else handle online for them, one of the largest players in the ecommerce space: Amazon.
It goes back to the year 2000 when Amazon and Toys R Us signed a 10 year agreement that would make Toys R Us the exlusive vendor of toys on Amazon. So what happened was when you would click on toysrus.com it would send customers to their page on Amazon.
The deal started to fall apart when Amazon started allowing other toy retailers to sell through its site, because they complained Toys R Us didn't carry enough stock. So, they sued in 2004 and terminated the contract, then did its own online thing in 2006.
Coincidentally, the same thing happened with Borders (the large book store chain) which had a similar partnership with Amazon, lost out on embracing online and owning the entire workflow of selling online. Essentially Amazon was the site customers would see when ordering from these retailers.
here's what I don't understand - if the equity firm took out a huge loan to buy Toys R Us, how come it's Toys R Us that's going bankrupt? Did they transfer the debt to Toys R Us? I don't understand M&A at all but that seems backwards.
Because with $5 billion in debt, even if they devoted 100% of that $200 million/year profit to paying off the debt, it'd take 25 years for them to pay it all back -- and that's assuming the debt isn't accruing any interest over all that time. Which is why the parent called the debt load unserviceable.
That still doesn't really make sense. A bankruptcy reorganization would make more sense than a complete shutdown, if the stores themselves were really profitable.
OK so the debt load became unserviceable and the company went bankrupt. But why doesn't the administrator keep the stores running? The creditors would get an asset worth $200 million per year which is better than nothing
> It goes back to the year 2000 when Amazon and Toys R Us signed a 10 year agreement that would make Toys R Us the exlusive vendor of toys on Amazon
If you go back a bit further, TRU had tried and failed a couple of years to do their own ecommerce. IIRC, both attempts were built on coldfusion, and both failed pretty hard. Not that it was necessarily solely CF's fault, but there were problems (probably a combination of technical and political) that prevented TRU from doing their own ecommerce. A deal with Amazon to handle your ecommerce was probably about the dumbest "short term thinking" move a company that size could make. I say it with the experience of having worked in ecommerce in 1998/99/2000 and saw behind the scenes of some pretty large operations. It wasn't pretty, but TRU could certainly have made things work on their own or outsourcing to a company like where I was working then, and it would have worked, without resorting to Amazon.
The original Amazon executable C and later C++ since there really was no other alternative (this was circa 1994). In the late 90s, Perl started making its way into the front-end.
Either way, the tech stack has little to do with the success of the business.
We tried to sell them while I was at Shopify Plus. They laughed at us for "only" charging $2k/month for ecommerce, said they expected to spend way more on an "enterprise" platform. Never ended up replatforming, never found someone expensive or "enterprise" enough (lol).
It's funny, I was pretty young back then and I though Amazon WAS TRU because of those site redirects. It remember going on the site and thinking how incredible it was, they had everything compared to other store websites and even other stores in person. It really left an impression on me and was a gateway that guided me to primarily shop at Amazon for years after - really just until recently.
Especially don't outsource your sales if your core competency is sales. The bet Toys R Us was making here was, essentially, that this whole e-commerce thing would be a flash in the pan and they could go back to selling primarily through brick and mortar stores before the decade was through.
You might be interested in a HN submission from last week, a WaPo story of a brief history of Toys 'R' Us' recent financial troubles. In short:
> The company has struggled to pay down nearly $8 billion in debt — much of it dating to a 2005 leveraged buyout — and has had trouble finding a buyer.
My thoughts on why they failed, I feel, are a lot more simplistic. Maybe oversimplistic and based on my own anecdotal experiences, but I don't see myself as an outlier here, so I feel a connection to others that went this way.
Simply, Toys 'R' Us did it the best, but their competitors, Walmart, Target, etc. did it at all. Sure, I couldn't go play a Nintendo Gamecube at Walmart like I could at Toys 'R' Us, or see all the neat Lego models and peer at them... it was still competitively priced and super convenient.
They were doing as a specialty what Walmart made a department. Home Depot and Lowes seem different to me. There's an air of skill needed in a lot of what they sell, so the added friendliness and help is a great value-add. But Toys 'R' Us, I believe, lacked that. What kind of value can you add to a toy that another big box retailer can't very easily? Other than the odd collectable that popped up here and there, TRU never really gave me a good reason to add them as a stop to my trip.
Only reason they failed? I highly doubt it, but I feel it was a big reason. I think they would have worked pretty well if they leveraged their experience and connections and joined with one of the big retailers like Target or K-Mart.
EDIT: And I know they sorta joined with Amazon, but I mean more in terms of a place where they could set up displays and let kids really go to town with feeling the atmosphere of the store. That, to me, was their game and they did it well.
My son just had his birthday, we took him there and gave him a $20 (we got him a few other things, but we wanted to teach him about money) and let him choose how to spend it.
You could do that online, but when you get to run around the store looking at the toys, it's clearly more fun for him.
There are a few bespoke toy stores around me, but Toys R Us is his favorite.
Where 'win' means they cut quality to shit, sell off assets, fire a bunch of people and hire the cheapest contractors to do the work, everyone good leaves, and the company reputation is forever ruined, ... but Bain comes out ahead. And 'loss' means, well, pretty much the same thing.
I admired Toys R Us. It was a complete shock and utter disbelief when I heard the news of the bankruptcy. Because the way the stores are run it never felt that way, although the question that how do they manage to do all this was always there in the back of my mind. I wonder why, if they are so much in debt and not doing well, nothing much has changed inside the store over years. Its the same huge store with loads of stuff pouring out of every corner. I don't know why they didn't consider cutting down costs at the store level.
I've been having an interesting loop of thought about this chain's bankruptcy. Obviously, I'm nostalgic about it, and it's sad, but I am hesitant to say that a national chain going away is some cultural blow.
Given my age, I tend to think it's sad that shopping is less of a social event now. However, I don't think it's a core spiritual need that we go somewhere and spend money together. In fact, I'm not even sure it's a positive.
If people are taking care of their shopping at Amazon, maybe that's more time to do real social stuff and not consumerism masquerading as social stuff.
I still don't think online will take off soon as a popular way to buy for toys. There is a reason why almost all toys come semi demo-able with buttons you can push and open-ish boxes. Amazon is apparently behind in apparel for a similar reason, you can't try anything on!
I respectfully disagree. I think the only thing going for toy stores is last-minute shoppers. Sure if you get a toy in a kids hands, they're going to want it. Which is exactly why I don't want to go to toy stores with my kids. I can find new toys online that my kids like instead of being forced to purchase whatever mass consumer toy is in my face when I walk into toyRus because they are getting a bigger kickback on it.
That is a nice article. What a strange maneuver from his second wife! He must have been desperately in love, to sign a prenup like that.
...their only regrets were employees who would be losing their jobs, suppliers who would be losing their best customer and all the kids who won’t grow up with Toys “R” Us.
Ugh, if my nieces and nephews are any indication, kids will still get way too many toys even without this store.
I'll never forget going to Toys R Us and walking down the computer/video game aisle. It was vast. Wall-to-wall Atari, Commodore, Vectrex (!!) ... walls of just game boxes you could look over. Then pull a slip of paper out and walk to a literal Cage where you could get the real deal.
That place was magical to me as a kid. (1980s, if it isn't obvious.)
I've recently got back into retro gaming, having somewhat tired of the cost and constant updates to modern titles, and looked into picking up a Vectrex because I never had one as a kid: working examples are now going for £900+ in the UK so I dropped the idea.
EDIT: Having said that, I just checked eBay again, and it seems like availability is up and prices are down. A bunch of auctions under £100, and some Buy It Nows for around £200. Hmm.
Our (richer) cousins got bored of their vextrex, so it passed to my siblings and I. At the time I thought it was near magical, not needing to take over the family-television, or load games from cassette.
I still remember the fun of playing games with the wrong overlay placed over the screen. For those who don't know the vextrex used vector graphics, only in white, and alongside the cartridges each game contained a transparent piece of plastic with colours, score-labels, etc, which you placed over the screen.
The wikipedia article has a couple of brief pictures that make this more clear than my early-morning words could:
That feeling of grabbing a Sega game box off the shelf (after agonizing about which game for what felt like forever!) and taking it up to the counter, where they'd take the box, turn around to a filing cabinet behind them, and pull out the actual cartridge and put it in the box. It felt like dreams coming true.
I understand the "Lazarus" reference. I just don't understand how the death of someone who hasn't been involved in the company for 20 years would presage anything about its future.
> saddled with more than $5 billion in debt
Wow, I haven't yet followed the story of Toys R Us but that is a huge amount of debt. I can't imagine what severe mismanagement happened at the company to allow this. Must have had some ex-government workers managing finances (/s)...
> Since Lazarus stepped down as chief executive officer in 1994
Ah, so it was well after he left. It's sad to see your creation falter but it wasn't his baby anymore. Many great companies end up failing after their original founders leave. I'd be curious to read more about how they messed it up so badly.