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Comment by ceejayoz | Hacker News Reader

Cite for the above: https://www.bloomberg.com/news/articles/2018-03-16/who-kille...

Buy company. Take out massive debts on company's books. Withdraw hundreds of millions in "fees". Let company collapse. Rinse, repeat.

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Taking a corporation private, loading it with billions in debt, starving it of funding and sucking it dry before collapse should be a criminal offense IMO

Unfortunately that's the nature of business. Sometimes it's impossible to predict market situations 10, 15 years out. I doubt anybody at Bain could have predicted in 2005 that Amazon would completely dominate the retail market in 10 years. Also, some responsibility falls on the debtors themselves for taking on potentially risky investments, but there are so many loopholes and gotchas here that I really can't comment much on that. While this type of private equity story seems more and more common these days, the opposite happens fairly often as well, and private equity firms like Bain make insane amounts of money from these types of strategies.

Bankruptcy in general is shady though and no matter what, when it happens, somebody is getting screwed out of a lot of money... usually the debtors.

Amazon doesn't dominate the retail market. Walmart still has much higher retail revenue.

Excusing this as "the nature of business" is extremely defeatist. We could easily make it so that Bain is back on the hook for these debts, so that they actually care about the outcome of the company.

Keep in mind, Toys R Us had some 20% of the online toy market. And without the debt hanging around their neck, they'd actually have funds to invest in competing.

I don't think you fully understand how this works. Bain doesn't get off the hook here with zero losses. In these bankruptcy situations, equity holds (Bain) usually get their equity stake wiped completely. If they had hundreds of millions/billions of dollars in equity, all of that is now gone. They will recover some of the money from the liquidation of assets however they will immediately use that to pay of their own debts. The debtors however get screwed even further... most if not all of them get absolutely nothing.

"Bain doesn't get off the hook here with zero losses."

They make the company pay them dividends while saddling the company with their debt.

"The debtors however get screwed even further... most if not all of them get absolutely nothing."

And yet, they keep lending to these vultures. I have no sympathy.

> They make the company pay them dividends while saddling the company with their debt.

Yes that is true. Is the sum of dividends over X years >= the amount of equity wiped out in a Chapter 7 liquidation? Impossible to say... the company is private.

> They make

They didn't make them do anything. They bought the company... they can do what they want as owners. That's just how this game works.

And that's not a good enough argument anymore. They did force this upon the company, and they are feeling absolutely none of the consequences of their decision.

> they are feeling absolutely none of the consequences of their decision

Man I wish I knew the fine details of the books of a multi-billion dollar private equity firm like you do.

How could Bain not predict that Amazon would dominate toy sells?

Toys R Us made a 10 year deal with Amazon to be the exclusuve toy seller in 1999, that had already fallen apart by 2005. Amazon was already the top online toy reteller by then. As far as debtors being "screwed", hopefully they are both diversified enough and demanded enough of a risk premium for them to at least break even on their entire portfolio of loans.

https://qz.com/1080389/a-dot-com-era-deal-with-amazon-marked...

"Fallen apart" is a nice way to put it. Another way to put it is that Amazon duped Toy's R Us into a terrible deal, learned everything they could about the toy market, then dumped them and violated their contract knowing that regardless of proceeding lawsuits (which Toys won) they would dominate the online toy space in the future. Everybody here blaming Bain, when the reality is that Toy R Us got thoroughly outplayed in the online space and never learned their lesson.

These were supposedly smart business people. You are always in danger when you outsource something that should be your core competency.

Apple learned that lesson a decade ago. If you look at the post Steve Jobs Apple, they brought more in house - retail, chip design, software, and rumors are they are trying to bring screen design more in house. Anything else, they try desperately not to depend on one supplier - commoditizing their compliments. (https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/)

I think the terms of the loans matter a little bit.

If the money is coming from investors that are getting bad advice, that's a problem. If Warren Buffett wants to risk $4 billion on some Bain scheme, meh.

Private equity deals where a major employer is loaded with debts on purchase usually cripple the company and turn it into an also ran. You'd think politicians would insert themselves at this point particularly when companies collapse. TRU is by no means the first company this has happened to.

Manchester United in the UK were bought and loaded up with debt. They are ok now as the team is doing well, but if they stumble there is a colossal mountain of debt that still needs servicing regardless.

The whole concept of being allowed to financialize delicate businesses needs more regulation IMO

NY Times also has a good article on it: https://www.nytimes.com/2018/03/15/business/toys-r-us-bankru...

Are the companies that are writing these massive debts actually making money at the end of the day though? If that stops then the whole industry and practice will stop.

Generally yes. Otherwise they don’t do them. But when the market gets frothy, a bunch lose at once. (And the life insurance companies and pensions counting on them get hurt)

Claire's and Sears were killed by the exact same thing.

Sears already had a mail-order business that sold literally everything from hand tools to houses. The venerable Sears Catalog was amazon.com in printed form.

A bust-out scheme is the least of their failings.

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