The web blew up at the same time as the Reagan/Clinton/Bush financial bombs were detonating, leading to a huge private equity bubble in which super-wealthy Americans used debt financing and other forms of financial engineering to buy out successful companies, then hollowed them out, selling off their real-estate and plant, loading them up with debt, and raiding their reserve funds.
This meant that when the internet came along and started to challenge their markets, these incumbent firms were offering inferior products and had no money and no ability to borrow in order to pursue experiments to adapt to the changing market. These century-old companies had weathered many transitions in their history — the internet's insurmountable challenges were as much the fault of debt-loading as they were anything inherent to the net.
A new analysis in the Financial Times found that the majority of companies that were acquired in leveraged hedge-fund buyouts "have either defaulted, gone bankrupt or are in distress."
The stories of these firms are bananas: they're taken private, then put through IPOs, then taken private again, then thrown at the public markets again. At each turn, the fund managers and at least some of their investors take home giant paychecks — and the companies' fortunes get worse and worse.
The internet was always going to challenge these businesses, but they went up against the net having been cruelly flensed of their assets, reserves, and will to live.
"We are at historic highs [for distress], and we are not even in a recession," says Charlie O'Shea, retail analyst at Moody's. "If you're a CAA rated retailer [a deep-junk rating by Moody's], you have no flexibility at all. If you're highly leveraged with a product mix that goes head to head against Walmart and Amazon, and you are looking to refinance right now, what reception do you think you're going to get? It's tough out there."
Mr O'Shea says he is looking to the first quarter of 2018 to see which "shoes are going to drop next".
Neiman Marcus, the luxury department store that owns Bergdorf Goodman, is also on his radar. The Texas-based company was one of many buyout deals struck at the top-of-the-market. Neiman was taken private by TPG Capital and Warburg Pincus for $5.1bn in 2005, and eight years later was sold to private equity firm Ares Management and Canada Pension Plan Investment Board for $6bn.
US retail's turbulent relationship with private equity [Eric Platt and Anna Nicolaou/FT]