Bain Capital Helps Kill Another Iconic American Company

"Since Toys ​"R" Us filed for Chapter 11 bankruptcy in late September there has been much speculation as to what, or who, is to blame for the iconic toy company’s collapse. Some commentators have pointed to a general decline in the toy industry, with kids increasingly preferring app-based digital games to physical ones. Others have cited the company’s poorly constructed website and overpriced products, as compared to competitors like Walmart and Amazon.

Private equity might be a more vulgar form of managerial exploitation, but its pathologies are the same. Cut-rate wages, insecure jobs and rigid hierarchical decision-making. As the story goes, Toys ​"R" Us was selling increasingly unpopular products inefficiently and at prices that didn’t reflect the current economic landscape. So is it really a surprise that the company was finally forced to file for bankruptcy, potentially closing its 1,600 stores in 38 countries for good?

Yes, genuine market forces such as bad pricing models or changing consumer preferences could be to blame. Goods cost more to produce. Tastes change. Mistakes are made.

Upon closer examination, however, this analysis doesn’t hold up. First, the global toy industry isn’t in decline. In fact, it’s been growing consistently over the past five years. Physical toys may be less popular in the United States than they once were, but internationally—particularly in Asian and Latin American countries—the play business is booming. And most of Toys ​"R" Us’s profits actually come from its Babies ​"R" Us affiliate which sells not just toys but also health, safety and educational tools for infant care.

Yet most importantly, this analysis fails to account for how Toys ​"R" Us wound up so deeply in debt in the first place. In 2005, as the company’s stock was regularly losing value due to mediocre sales, management decided to sell the company in a leveraged buyout to a trio of buyers, real-estate-investment trust Vornado Realty Trust and private equity firms KKR and Bain Capital.

This trio played a critical role in the downfall of Toys ​"R" Us, through imposing massive debt obligations on the company and requiring it to pay back its debts so that its buyers could turn a profit. Meanwhile, the finances of the company were thrown into disarray and employees were hit with wave after wave of layoffs."