The Toy Store They Killed

Maryjane Williams learned her life was over on a conference call.

Twenty years on the floor. Five kids. She carried the medical benefits for the whole family, and the life insurance, and she had just turned fifty. Somebody she had never met, in a room she would never see, had done arithmetic that ended her — and scheduled a call so she could hear the result with everyone else.

She had given those twenty years to a company that, the year the arithmetic started, sold one out of every five toys in America.

The story you have heard about Toys “R” Us is that Amazon killed it. That retail changed and it couldn’t keep up. That is not what happened. The company was profitable. Its operating income was growing. It was selling one in five toys in the country. What killed it was $5.3 billion in debt it never borrowed to build anything — debt loaded onto it, by people who never worked a shift, to buy it using its own body as collateral. And the thing they were really stripping was never on any balance sheet at all.

That’s the argument. Here are the receipts.

The Leveraged Buyout

In July 2005, three firms — KKR, Bain Capital, and Vornado Realty Trust — bought Toys “R” Us for $6.6 billion. They put in $1.3 billion of their own money. The other $5.3 billion was debt, and here is the move that makes a leveraged buyout what it is: the company borrows the money used to buy itself. The buyers don’t carry the loan. The bought does.

Overnight, Toys “R” Us owed $450 to $500 million a year in debt service. Half a billion a year that could have gone to the website, the stores, the supply chain, worker training, lower prices — gone to creditors instead. By 2007, debt payments ate 97 percent of the company’s operating income.

The company was profitable. The debt was not survivable. Those are two different facts, and the gap between them is where 33,000 people fell.

Extraction by Design

They didn’t only load the debt. They extracted while it bled. The advisory agreement signed at the buyout paid Bain, KKR, and Vornado $15 million a year in fees, rising 5 percent annually — and the contract said, in writing, that no minimum number of hours was required of the advisors. Fees for nothing.

The Private Equity Stakeholder Project counted $470 million in interest and fees paid to the three firms before the bankruptcy. Extracted from a company whose floor workers earned $8 to $14 an hour. That $470 million would have covered more than $14,000 in severance for every one of the 33,000 — the severance the company swore it could not afford. John Eyler, the CEO who ran the sale, took home $65.3 million when the deal closed.

Debbie Beard gave the company 29 years, an assistant manager in Chandler, Arizona. “The company makes $11 billion a year,” she said when it ended. “You kind of wonder. It must be an awful big debt if we can’t bring ourselves out of it.” It was. And it was placed there on purpose, by people who never learned her name.

What They Were Really Taking

Here is where the Amazon story falls apart, and I have to tell you something I watched with my own eyes.

I spent ten years, 1989 to 1999, on GM’s Quality Network maintenance team, walking component plants across North America. One of them was Saginaw. Saginaw had invented something nobody else in the world could do as well: cold-extruding hardened steering steel at room temperature, the metal’s own grain flowing along the part so it came out stronger than anything machined from bar. Steel does not want to do that — at those pressures it seizes and welds itself to the tool. It worked because of a piece of process chemistry developed on that floor, a phosphate coating that carried lubricant down into the die. Get it wrong, wreck a die. Get it right, make a part the competition couldn’t touch.

That secret sauce was not written down anywhere. It lived in the hands of the men who ran the tanks and the presses, and in the head of the man who coordinated my work there, Dave Hitz — a local expert of the kind every real plant has and no org chart ever captures. The floor that Roger Smith was trying to automate until it needed no one was, at that very moment, quietly forming a whole cohort of engineers: Ravi Dugiralla, with a doctorate from Ohio State; Joe and Roland; several of us later named outstanding young engineers of the year by the Engineering Society of Detroit. The most valuable thing in that building was the one thing the plan was built to remove.

I tell you this because it is the same theft, in a suit instead of a jumpsuit. What Saginaw had, and what Toys “R” Us had, and what every company in this essay had, was formed capability — decades of it, crystallized in people. And here is the accounting fact underneath the whole series: that capability appears on no balance sheet. When one company buys another, the standard — ASC 805 — folds the assembled workforce into goodwill. It is literally not permitted to stand as its own named asset. So when the extractors arrived, the thing they could strip for free was the thing no ledger was guarding. You can’t loot the buildings; those are booked. You can’t loot the inventory; that is booked. You loot the people, because the people were never on the books.

That is why it is always the workers. Not because they are incidental to the extraction. Because they are the only asset the rules leave undefended.

Not an Accident — a Template

Toys “R” Us shows the theft run from the outside. Sears shows it run from the inside. Eddie Lampert merged Kmart and Sears in 2005 and spent a decade pulling value out through the front door — selling the profitable brands, spinning the real estate into his own vehicles, starving the stores while his hedge fund drew fees. Sears went from 300,000 employees to under 70,000, roofs leaking onto the merchandis