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Comment by voidmain | Hacker News Reader

Despite the title and the focus on the form of financing, none of the facts in the article even suggested to me that the company would be in any better shape if it had used equity financing rather than debt. It sounds, rather, like an unprofitable business that no one in their right mind would give any more money.

If someone thinks they can figure out how to make a workable business out of big box toy stores, it sounds like the name is for sale.

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You're missing the key piece: Toys R Us didn't go into debt for any good business reason, it was bought by a private equity firm and loaded with debt it didn't need. This is how private equity works:

1. A PE firm uses a combination of other people's money (limited partners a.k.a investors) and debt to buy a company.

2. The PE transfers the debt to the company's books. This way, if the company goes bankrupt the PE fund isn't liable for that debt.

3. The PE firm charges millions of dollars in fees for providing management services. This way the PE firm makes money regardless what happens to the business.

Toys R Us was profitable before it was bought and saddled with debt that was essentially used to purchase it's own business.

> Toys R Us was profitable before it was bought

“In 2004, after years of flat sales and falling profits, the Toys R Us board of directors put the company up for sale” [1]. Then, over “the next five years, sales at Amazon quadrupled to $34 billion”.

Toys ‘R’ Us was bought as meagre profits fell and right before Amazon went for them. Blaming this outcome on the debt load is inaccurate.

[1] https://www.google.com/amp/s/www.marketplace.org/amp/2018/03...

The article you reference blames the debt load.

> To compete, Toys R Us would have had to invest significantly in its website and stores. But the retailer was using most of its available cash to pay back its debt.

Yes, profits were falling crazily, but the company was still profitable. Without the debt load, they could've spent some time losing money while they pivot to a new business strategy. The debt load really prevented them from trying anything except surviving as long as they could.

> they could've spent some time losing money while they pivot to a new business strategy

There is zero evidence, in the history of Toys 'R' Us or their failed competitors, that another strategy would have worked. More likely? It would have limped along until the next recession. In any case, I see no reason to blame capital structure when a simpler explanation abounds: Amazon taught people to buy toys online.

Why is this legal?

Free market and all this stuff.

Also a similar "technique" (LBO to be exact) was used to break down a giant company into smaller companies, effectively shutting down monopolies at the expense of a small number of workers, often making big gain for investors. With the failure of RBR Nabisco LBO, investors think twice about this kind of venture nowaday. If Toys'R US failure could cost the investors a bulk of money, maybe this won't happen anymore with big business like this.

Anyway, if you take part of venture like this, you better be the law firm or the executives, especially if your target is a big company.

> Free market and all this stuff.

But in a truly free market, I think there should be no protection against bankruptcy. I mean, the government is protecting the PE firm from creditors.

Why wouldn't it be? Did the PE firm force someone to issue debt for a worthless business? I would hold the lender responsible for due diligence.

The question was more: why does the law allow this? They are using one company to benefit another, then leaving it in debt without financial liability. Seems like a gaping loophole in the law there.

Except they had financial liability: all the collateral they lost.

I don't understand why people keep repeating this story. Bain Capital had to provide huge amounts of collateral (upwards of a billion dollars), all of which was lost in the bankruptcy. Do people really believe that PE firms will write of a loss of hundreds of millions in order to make a few million in management fees?

The PE fund's capital is partly other people's money too. In particular, fund limited partners (the fund investors) put up most of the initial money. The PE firm itself also puts in money but not nearly that much. This makes it easier for the fund managers to make a profit themselves quickly, even if the fund investors end up losing.

very sad how far down i had to scroll, through mountains of support for the partyline, before getting to this, the truth of the matter!

here's one of many play by plays out there of what Bain capital has been doing for years: https://youtu.be/NS3s0xDL8A8

I'm familiar with this narrative, I'm saying that the evidence in the article, though the article is written by someone sympathetic to this point of view, contradicts it. The PE firms, despite their huge fees, lost a boatload of money. No one wanted to buy the business out of bankruptcy for more than it was worth piecemeal. There are easily identifiable reasons (Walmart, Amazon) why the competitive landscape is much tougher than when it was a profitable business. It sounds to me like the PE firms did a lot of harm by keeping the company from bankruptcy for so long.

In general, if a business is clearly profitable it should continue no matter how thoroughly you screw up the capital structure: the worst case is a bankruptcy in which the shareholders get nothing, the debt holders get very little, and a new capital structure gets created. When this doesn't happen, it's because the business is worthless or nearly so.

The financials aren't publicly available, but I'd expect PE firms still made money here. The funds probably lost money, but funds are an investment vehicle separate from the managing entity.

I disagree that profitable businesses can continue no matter the capital structure. You're assuming that there's a liquid market for businesses, or parts of them. For a huge retailer that's almost certainly not true. Additionally, the current owners have to actually want the business to continue. I would believe there's more value to a short-term owner in liquidating assets than accruing profits over a relatively short timeframe.

It at least sounds plausible to me that you could make a toy store a "destination" business if you did something to differentiate it from Amazon: kids parties, video game tournaments, something. You'd have to transform what it means to be a "toy store". Of course, that takes a lot of money, and with Toys-R-Us' debt load there was no way they could have afforded that.

I don't know if it scales up to big box stores, but this– plus adding food/café– is what a lot of game and hobby stores have been doing, and it seems to be working. There at least five stores like this in the Seattle area (2 of Café Mox, Meeples, etc.) and they seem to do good business.

Of more interest is will this scale up culturally. Going in this direction at scale means monetizing physical socialization. I've observed this while touring Tokyo, where the society and culture has accepted eye watering residential real estate prices with accompanying micro-sized residences by American standards, in exchange for scads of commercially-run spaces used for social activities. Socialization there seems to take place outside of people's homes, and in restaurants, bars, and other commercial venues. These venues seem predominantly mom and pop sized and run in the non-tourist areas, small, and affordable.

I have no idea if that will translate into American urban culture; I can see cases made for Millennials and post-Millennials embracing this model and rejecting it. I don't see it happening in the suburbs, much less exurbs. For this business model to work at scale, it would have to be embraced ubiquitously, but I'm not convinced there is a lot of space left to scale into after Starbucks got there first in so many locations.

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