Tuesday, March 27, 2018

A Tale of Bad Toys, Pierced Ears, Lousy Music, and A Misfired Gun

The past two weeks has seen four examples (that I know) of private equity transactions chocking companies to death or into bankruptcy.  Toys R Us, iHeart Media, Claire's, and yesterday Remington, the oldest gun company in America, all have declared bankruptcy, and one, Toys R Us is closing all its stores and liquidating. 

I am not going lament any of these bankruptcy filings.  Toys R Us can blame Amazon all it wants, but the Internet was around in 2005 when the PE firms acquired the toy store, and Walmart and Target sell plenty of toys, too.  I always thought Toys R Us' issues were more of a management problem.  Its stores were ugly and presented a poor shopping experience. Capital required for debt service rather than store upgrades probably helped make this worse.  iHeart Media focuses on radio, and my radio listening is way down, and how lousy and standardized radio has become, I don't plan on making a full scale return to radio listening.   I don't know much about Claire's as my ear piercing and bangles days are behind me.   I do know gun sellers are under pressure, but the troubles are recent, and if Remington - in an industry supported by a political party and the most powerful lobbying group in the country - had to surrender this fast, there were other issues at the company.

I suspect at the bottom of all these deals you will find that private equity principals received big bonuses after they convinced dumb bankers to lend them too much money.  Private equity principals banked their bonuses under phony pretenses using borrowed money with no recourse to them personally, leaving the acquired companies to figure out how to repay the debt.  I also suspect the former executives of the companies that sold to the private equity firms probably did alright, too. 

Consumers, employees, and investors are the big losers.  I always thought the purpose of business was to create long-term value for shareholders.  The goal to maximize shareholder value is the first lesson on the first day of business school.  Private equity deals work just the opposite - buying companies with other people's money, paying the PE principals immediate, big bonuses from the money borrowed to purchase the companies, and then letting the purchased companies struggle to pay the debt.  It is principal risk-free wealth maximization and shareholder wealth decimation.  Ugly business.

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