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Retail Chain Bail-Outs Doomed by Private-Equity Investors
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By: Teri Bernstein

 

 from CNBC

 

Retail chain stores have been suffering--internet sales are eating into ground-based stores more each year. Private equity firms have purported to come to their rescue by restructuring their debt in leveraged buyouts. The problem is, the restructured entity has more debt than it had before, and meanwhile, the private equity managers have skimmed off transactional fees. The zero-based budgeting that is typical of such takeovers cuts costs without giving any thought to the pre-existing company's culture.

 

Toys-R-Us has been a recent victim of this trend--Kohlberg Kravis Roberts, Bain Capital, and Vornado Trust bought it up in 2005. Now, Toys-R-Us is in the process of filing for bankruptcy prior to one last try to remain in business by making the most of the upcoming holiday sales possibilities. According to Rosemary Batt, co-author of Private Equity at Work: When Wall Street Manages Main Street, “Debt is the lifeblood of the private-equity firm, but it also sucks the life out of companies.

 

Source: "Toys-R-Us and the Trump Voter," by Sheelah Kolhatkar, New York Times, October 9th 2017 print issue, where it appears as "Played Out."

 

Discussion:

  • What other struggling companies besides Toys-R-Us have faced bankruptcy or death after investment by private equity companies? What happened?
  • How do private equity investors make their money? How do stockholders usually make their money? (cite an ordinary income stream and a capital income source)