Toys R Us Latest Victim of Private Equity Funds. That's Capitalism, Baby!
by John Lawrence, July 20, 2018
Following in the footsteps of Hostess Twinkies, Toys R Us is Toast in the US, but not in Canada. Here's how the scan operates. Some rich guys get together and start a hedge find or private equity fund - same thing. They used to be called Leveraged Buyout Funds. These guys then take over a publicly traded company by buying up all the shares using the company they're buying out as collateral. So they borrow tons of money to buy the shares, and if anything goes wrong, the company (not them) goes bankrupt. After they gain control of the company, they finegle every way they can to load more debt onto that company paying themselves handsomely with the borrowed money for management fees. Finally, the company under the weight of all that debt, can't make the payments any more and goes bankrupt and out of business.
This is exactly what happened to Toys R Us and many companies before them. Some rich guys walk off with millions and the employees get screwed losing their jobs with no severance pay. Only in Canada some rich guy put up the money to keep the stores there in business. This is the kind of financial engineering that has become the hallmark of 21st century capitalism. Of course Toys R Us was also under pressure from Amazon prime which has taken over the business of most brick and mortar stores. With husband and wife both working and deeply in debt to pay a mortgage and two car payments, nobody has time to shop any more except online.
The New York Times reported:
For over a decade, Toys “R” Us had been drowning in $5 billion of debt, which its private equity backers had saddled it with. With debt payments siphoning off cash every year, Toys “R” Us could not properly invest in its worn-out suburban stores or outdated website. Sales plummeted, as Amazon captured more children’s desires — and their parents’ wallets — for Star Wars Legos and Paw Patrol recycling trucks.
Toys “R” Us is the latest failure of financial engineering, albeit one that could portend a potentially more ominous outlook for private equity in the digital era.
30,000 Toys R Us employees will get nothing but a pink slip while the fat cats will make big money just for shutting down operations.
Here's what racked said:
Those who won’t take home any of the money made from these going-out-of-business sales are the very people running it: More than 30,000 Toys R Us workers are helping the brand through its liquidation process, and on top of not having a job once Toys R Us shutters for good, they also won’t receive any severance. These workers are now rallying for the failed toy company to pay them severance in a petition that already has more than 50,000 signatures.
“In the next few weeks, over 30,000 Toys R Us workers will be out of a job with no severance,” Colleen Kleven, a Toys R Us worker who created the petition writes. “Private equity funds and corporate executives shouldn’t profit by bankrupting a company and throwing people out of work. There are more than 1 million retail workers at private equity-owned retailers in the United States. This corporate greed is hurting me and my family — and it’s unacceptable.”
All I can say is: that's capitalism, baby. You want a different system? It's up to the people to create it. As capitalism comes to dominate the world's economy, financial engineering is hot all over the world . Private equity is taking over all small publicly traded retail companies, milking them first and then taking them bankrupt. That's capitalism, baby!