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Toys ‘R’ Us Case Is Test of Private Equity in Age of Amazon
MARCH 15, 2018 | The New York Times | By MICHAEL CORKERY.

The reality is that Toys “R” Us, which announced on Thursday that it would shutter or sell all of its stores in the United States, never had much chance at a turnaround.

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debt payments siphoning off cash every year, Toys “R” Us could not properly invest in its worn-out suburban stores or outdated website.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.....Most buyouts tend to work the same way. A private equity firm takes over a troubled company with the goal of sprucing up the strategy, cutting costs and overhauling the business over three or five years. But they often load up a company with debt to pay for the deal, which can prove problematic if the profits do not perk up.

In the age of Amazon, that formula can be dangerous. Consumer demands are changing so quickly that heavily indebted companies have trouble reordering their business to adapt and compete with better-funded rivals...... the deterioration of Toys “R” Us from a potential turnaround strategy to the end of an iconic brand — in a matter of months — shows just how difficult it can be for private equity to compete in a rapidly evolving industry. In retailing, Amazon is reordering everything on the store shelf. And children’s changing interest in games and toys, which now encompasses high-end electronics, adds to the complexity.....Enter Amazon. In recent years, the company had started to aggressively expand its toy business, creating a comprehensive, online showroom with low prices at the click of a button. Pressed by Amazon, Walmart also pushed hard into toys, dropping its prices to capture more market share.

Walmart could absorb the price cuts on toys because it makes up the profit on other items. But for Toys “R” Us, a price war on toys and games, its only offerings, was devastating.
private_equity  bankruptcies  toys  digital_economy  Amazon  Wal-Mart  KKR  Bain_Capital  Toys_"R"_Us  financial_engineering  LBOs  buyouts  shifting_tastes  category_killers  price_wars 
march 2018 by jerryking
One Way to Look at Private Equity -
January 16, 2012 |NYT | By ANDREW ROSS SORKIN

Alan Webber
Santa Fe, New Mexico


With all due respect, I think Messrs. Levy and Sorkin are missing the point: The question is not, does private equity play a valuable role in the economy? The question is, does Mitt Romney's experience in private equity represent a valid argument for why he should be President? Most people would say that private equity plays an important role--in the private sector. Of course, there are firms and individuals who have played the game fast and loose. Just as there are many who see the contribution that private equity can make to innovation and entrepreneurship. Not relevant, however, to the debate at hand. The debate at hand is over whether Mitt Romney's experience at Bain Capital has any bearing on his being President? Would you want the U.S. economy run like a private equity fund? (And if it were, wouldn't the President be picking winners and losers? Not very conservative, that idea!) Mr. Levy doesn't have to defend private equity. He needs to tell us whether being the head of a private equity fund in any way qualifies an individual to be President--a job which has to serve more stakeholders than just the financial markets. This column answers the wrong question and doesn't even ask the right one.
private_equity  Andrew_Sorkin  letters_to_the_editor  Bain_Capital  questions  financial_markets  Mitt_Romney  Campaign_2012 
january 2012 by jerryking

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