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This is what it looks like when investment companies take over your ship. Except that in reality, it’s often more brutal.
They do not wear eye patches, or wooden legs, or carry parrots on their shoulders. Their uniforms are suits of a dark color, they travel in private jets, and rather than bury their plunder in oaken chests they wire it to an offshore account. But they are pirates, make no mistake, who attack the vessels of commerce built by other people, take them over, plunder them, and leave them ghost ships drifting aimlessly, the crew gone and the lives of many thousands in ruins.
Consider just two examples of their work.
The marauders swarmed the decks of Toys R Us in 2005. They were a “consortium of investment funds” (translation: a boatload of pirates) including one you might have heard of: Bain Capital of Boston, founded by that paragon of Mormon rectitude Mitt Romney.
The pirates borrowed five billion dollars from a few of their friends and “bought” Toys R Us, and immediately assigned the entire debt to the company. With the company now making the $400-million-a-year payments on the crippling debt, the pirates also required it to pay them an additional half billion dollars in fees, bonuses and dividends. What they did not authorize was any investment in the company — no new technology, no attempts to counter the loss of business to online sellers, no refurbishment of stores.
Business, of course, deteriorated, and 12 years later there was not enough money coming in to pay the pirates their fees and bonuses and dividends any more, or keep up the payments on the debt, now $8 billion against $6.6 billion in assets. So, as pirates do who are almost finished plundering a captured ship, they scuttled it. Bankruptcy ensued (filed one week after the pirates still on board paid themselves $8 million in bonuses for splendid performance), liquidation began, and 30,000 employees were fired without severance pay.
Petsmart — a Toys R Us for pampered pets — was thriving in 2015, with $7 billion in revenue from 1,400 big-box stores. British buccaneers — a wealth management company named BC Partners, with no experience at all in American retail sales — “bought” the company for $8.7 billion dollars, the most expensive chain-store purchase in history. But the buccaneers weren’t worried, because it was borrowed money and as soon as they got control of the company, the company a) assumed all the debt and b) declared a “special dividend,” payable to the new owners, of $800 million. Mission accomplished.
Unlike the Toys R Us pirates, the Petsmarteers actually tried to sail the ship they had purloined, despite knowing nothing about America, pets, or retail store management. They did recognize the threat posed by online competitors, and so they bought one. They borrowed another $3.4 billion to acquire Chewy.com in the most expensive acquisition of an online retailer, ever.
In a country where spending on pets has nearly doubled in the last ten years, the biggest pet supplier in the country has been unable to make a profit, mostly because of its enormous debts. In the third quarter of last year Petsmart lost $56 million. All that remains now is for the looters to run up the Jolly Roger, sell the furniture, fire the 55,000 employees and scuttle the ship.
Scores of other companies whose names are familiar to us are being ravaged as we speak, by merciless mercenaries who destroy companies and people in order to fatten their already bloated offshore bank accounts. They are pirates, and it’s past time we remembered what we used to do with pirates and set them swinging from their own yardarms.
Except they bought the government. Had the government create the debt they use to buy buisnesses. Next they sink the ships of state….
When I told the Captain that we had passed the point of no return, he shrugged and replied:” Which one.”
Please excuse my ignorance but how did the pirates buy the company to begin with? Was it through stocks or something? I really know nothing of this, but could it be a case where these companies rolled out the red carpet to invite the looters in because they were in dire straits?
I did not know this was the story behind Toys R Us. I had heard only they were in trouble with debts and had to declare bankruptcy.
Here’s the technique: you buy a house with no money down, and give the payment book to your parents. The real estate agent gets paid, the lending agent gets paid, the lender immediately sells the loan so he gets paid, all with money generated by the deal, not provided by you. Now you’re a homeowner, free to sell the furniture, the drapes, use the hardwood flooring for firewood, and eventually walk away.
Toys R Us was not in dire straits when the looters came aboard. They had had a quarter or two of less than stellar profits, and some “activist hedge fund” stockholders who started to scream “sell” because that was an easier way for them to cash out than solving the business problem. They didn’t exactly roll out a red carpet for the pirates, but they left the back door open.
Mr Lewis, thank you so much for sharing with us this special easy way to make money. What a fool I’ve been not to have thought of it. Who cares about moral scruples anymore, what with that giant shithole towards which we’re now all headed? I think I want to be a pirate now. Thanks again, Mr Lewis, you’ve been a real pal. :D
(Ummmm… You’re not about to take me seriously, are you?)
Thank you for taking the time to explain this to me, although the explanation still defies understanding (from a perspective of honest pay for honest work).
I’m glad you caught that assumption of mine of the company being in trouble. It seems nowadays, but it may have alays been the case, that if a company’s profits are not growing it’s judged a failure. A company cannot be just profitable and sustainable, it must grow.
Please keep up the excellent work you do, Mr. Lewis.
Reminds me of the scene in “Good Fellas” where Pauly buys in to a successful restaurant and immediately extorts the owner for more than he’s worth. In the end they burn it down for the insurance.
There’s a reason why I feel a certain strong aversion to the three-piece suit with a tie. To me it’s a type of clothing that emphatically does not signify civilization — quite the opposite.
Give me a loin cloth anytime.
Another local example is ManorCare, then HCR ManorCare. Very profitable according to a friend who worked there for 30 years. The hedge fund, Carlyle Group, bought it, mortgaged all the real estate, took the equity out for themselves, then leased back the real estate to the operating company at high rates, stripped out personnel and BINGO, you have a crippled company struggling to make ends meet. The hollowing out of what is left continues until the crash…
Hello tom.
In your comparison the loan is handed to the parents, who is the parents in reality?
How is it possible for someone to buy the business and not inherit the businesses dept?