How a series of leveraged buyouts killed a perfectly decent business.
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This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/toys-r-us-death
This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/toys-r-us-death
The marriage of the LBO financing structure combined with a business that needs to invest and innovate to survive in a rapidly changing market becomes a straight jacket that chokes off a businesses ability to change and be resilient and is a bad instance of capital expertise. The debt service costs combined with a preoccupation to return dividends to equity owners leads to short-term cost cutting decisions, fragilizes the business and rarely allows the business to survive. The post-LBO bankruptcies of Payless and Toys “R” Us are instantiations of this idea. Often, the success of this strcuture is oversold (hat tip: @cedric).
In contrast, this structure did work for Dell, but I think it was due to several factors: the FCF generations of PC business, the embedded assets of VM Ware that gave Dell / Silverlake latitude, and Michael Dell’s significant positions, attention, and credibility / reputation. What other successul LBOs have occurred? Why were they successful?
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Thanks for the synthesis, @ajzitz — your comments have made me more determined to tell the story of a successful LBO, perhaps to serve as a contrast to these cases within the same concept sequence. Yes, Dell counts as one, but Dell was quite special in that the founder/operator went in with full knowledge of the consequences, and treated the PE firm as capital+strategic partners, not as operators.
I’m open to ideas — my original instinct was to tell the first J. Crew buyout, but that was more luck than anything else. (I probably still will publish that case, but it’s not a great example of a radically successful LBO because Mickey Drexler was a hail-mary hire.)
I’ll be adding a new case in a few hours, which should close out the Capital Expertise series.
@ajzitz The case on Katharine Graham is out. I find her story so compelling that I’m making it publicly available, though tomorrow’s Commoncog post, which embeds this case, will not be.
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