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Barbarians at the Gate: The Fall of RJR Nabisco?
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Super simplified version:
Let's say you want to own Bob's Hardware store down the street. Bob's is super profitable, has no debt and the price of buying Bob's hardware store is really high. And y'know, the economy is risky so you don't want to use your own money or get a loan yourself to operate the business because then you'll lose money if you can't pay back the loan you took out, the bank would be after you. But man, you really want Bob's hardware store!
So what you do is go down to your pal at SuperBank and get a massive loan to buy the store with Bob's hardware store's assets as the collateral, meaning the land that Bob's hardware store owns and all of it's assets. You basically go to the bank and get a loan to buy the business based off of the strong health of the business.
So instead of you having to pay off the loan to buy the store, the store itself now has to pay off the loan to buy itself. For you. This puts a massive amount of debt on Bob's hardware store that the company itself has to pay off, again, not you. If Bob's has a reduced income from competition and Bob's profits can't pay the interest on the loan you used to buy Bob's, then Bob's will file bankruptcy. You'll be fine though, after all, almost all the money to buy Bob's came from the strength of Bob's assets and profits! Yay you!
A "successful" LBO sees Bob's continue to make a big profit and then Bob's will pay off the debt for you, making Bob's even more valuable and you'll own it despite not actually using your money to buy it, so now you can then take the company public (offer shares on the stock market) or you can just outright sell it for a big profit. The 'best' way to accomplish this is to buy Bob's with the loan, then fire anyone remotely expendable to reduce costs so you're able to pay off the loan debt that was needlessly put on the company for you to acquire it.
A "unsuccessful" LBO sees Bob's not be able to pay the debt you put onto the store, it declares bankruptcy, you swoop in and buy anything you want at a bargain price with your own money and let the rest of it be liquidated. Yay you anyways!
It is a predatory economic transaction that is used against companies that have a strong cashflow and a healthy business. And it's all completely legal.
Now that you understand a simplified version of this practice, this is how things went with Toys R' Us:
The leveraged buy out of Toys R' Us was around a 6 billion dollar loan that went onto Toys R' Us as debt back in 2005. Each year, Toys had to pay 400 million dollars as interest/loan payments to try to pay off the loan used to buy it by Mitt Romney and his gang of crooks at Bain Capital.
Due to having to dump so much of their income off as payments towards this giant loan, the company wasn't able to invest back into itself as e-commerce became more and more important which caused it to have a poor online infrastructure as the economy started changing towards online purchasing. The inability of the company to have funds to invest into itself caused the companies overall income to drop below the point where they could both pay off the loan and pay their toy suppliers.
Toys R' Us still brought in a tremendous amount of money and without the needless debt piled onto it by Bain would have operated smoothly, without issues, even in it's current state of not innovating over the last thirteen years. Again, lack of innovation due to the fact that the money they needed to invest into themselves was being sucked out to the banks Bain used to finance the purchase.
Don't worry though (and I know you were worried about the bank!), the banks will be fine with this result. The land Toys R' Us owns will be taken by the bank and sold off and the liquidation of all the toys, games, fixtures and other assets inside the physical stores will ensure that the bank will lose next to no money. Hell, due to interest paid on the loan by Toys R Us over the last thirteen years, the bank will make money on the deal itself. So Bain Capital won't lose money, the bank will make money, everyone wins!
Well, except the employees and the communities that received tax revenue from what was previously a healthy business. But who gives a shit about those people!
Recommended reading: https://www.amazon.com/Barbarians-Gate-Fall-RJR-Nabisco-ebook/dp/B000FC10QG - An award winning book about the leveraged buyout of Nabisco and the chaos that ensued. And 'lest you think this garbage is simply a modern invention of the last couple decades, the book was written in 1989, heh.
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