--:-- [Theme music fades out]
--:-- Noel King: Welcome to Today Explained. I'm Noel King.
--:-- Noel King: Hey guys, did you hear that a Barnes & Noble is opening in Northwest D.C.? Oh, also one in Conroe? And another in Panama City Beach? Plus Roxbury and Paramus and Cincinnati and Cheyenne and Flower Mound and Gainesville and Marina del Rey and Burlingame? And four in Dallas? If you have even a passing interest in the American economy or in books, one of the most stunning stories this holiday shopping season is the rebirth of a bookstore chain.
--:-- Noel King: Barnes & Noble went from shop around the corner to big box bad guy gobbling up the competition as portrayed on screen in You've Got Mail. You could discover a lot of things if you really knew me. If I really knew you, I know what I would find. Instead of a brain, a cash register, instead of a heart, a bottom line. And then came the internet, and Barnes & Noble very nearly died.
--:-- Noel King: Now, from Doylestown to Meridian to the Eastview Mall in Victor, Barnes & Noble is back and how. And how? that's coming up on Today Explained.
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--:-- Noel King: While other platforms duct tape tools together, ServiceNow seamlessly unifies people, data, workflows, and AI, connecting every corner of your business. And with AI agents working together autonomously, anyone in any department can focus on the work that matters most.
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--:-- Nilay Patel: What do you think today? Explain this. I don't know.
--:-- Nilay Patel: Have you seen You've Got Mail?
--:-- Nilay Patel: I have seen You've Got Mail. Do you like it?
--:-- Nilay Patel: I think You've Got Mail is like a perfect example of what the word is all about, which is that technology dominates the culture, whether you like it or not.
--:-- Nilay Patel: So they made an entire blockbuster rom-com movie about AOL. Fundamentally, that movie is about an AOL notification sound. You've got mail. And I think that is amazing.
--:-- Nilay Patel: Nilay Patel is the editor-in-chief of The Verge, and he hosts the Decoder podcast.
--:-- Nilay Patel: The entire story of Barnes & Noble is a story of growth through acquisitions. so there was a barnes there was a noble oh they joined forces in the late 1800s their flagship store in new york has been operating since 1932 in new york city and you know it was a bookstore and then what happened is it just started voraciously acquiring other bookstores first in new york and then in the 90s they acquired b dalton which is like the ultimate mall bookstore and they became this gigantic force in books.
--:-- Nilay Patel: Do you have any books on electrical wiring?
--:-- Nilay Patel: Sorry, have you tried Barnes & Noble?
--:-- Nilay Patel: Barnes & Noble, of course.
--:-- Nilay Patel: And it all started with, you know, two guys joining forces, but it's been acquisitions and mergers the whole way through.
--:-- Nilay Patel: They just gobbled up other bookstores, other brands, and then we get into their You've Got Mail era where it's like, okay, Barnes & Noble is the behemoth, the Goliath. No one can beat them. They're kind of the bad guy.
--:-- Nilay Patel: And then, for people whose memories kind of cut off in 1999, as maybe mine does, what actually happened to Barnes & Noble? The internet. I think pretty directly the internet happened.
--:-- Nilay Patel: So Barnes & Noble was built to become that Goliath, to become that villain in a pre-internet age. They did it, right? They did become the villain in You've Got Mail.
--:-- Nilay Patel: They were eating all the small bookshops and small bookstores really couldn't compete with their selection, with their prices. It was impossible to compete with a company of that size, unless you have the internet and Amazon can show up and offer unlimited selection.
--:-- Nilay Patel: It's not scary. And it's very, very fast. Amazon.com discounts so many books that even with the shipping, you end up saving money. It's fun. It's vast. It piques my interest.
--:-- Nilay Patel: This is the thesis of Amazon, is that we will have everything. And because we are a virtual storefront. We don't have to pay to have one copy of everything everywhere.
--:-- Nilay Patel: And so Amazon kind of begins to decimate Barnes & Noble's business. And Barnes & Noble reacts by first copying Amazon. Barnesandnoble.com. If we don't have your book, nobody does.
--:-- Nilay Patel: You know, they launched an ill-fated competitor to the Kindle called the Nook, which is an e-reader. Ah, I remember. Experience the only e-book reader in the bookstore you've grown up with. Nook by Barnes & Noble.
--:-- Nilay Patel: They are not a technology company. It's a bad product. And then they do not understand that Amazon doesn't have all these marginal storage and shipping costs.
--:-- Nilay Patel: And they try to put one of everything in the Barnes & Noble store. So Barnes & Noble starts stocking like hand sanitizer and gadgets and the store loses its identity.
--:-- Nilay Patel: And eventually the cost becomes too high and Barnes & Noble starts to fail. Barnes & Noble saying they expect they're going to close one third of their stores within the next decade because everything is moving online.
--:-- Nilay Patel: At that time, Barnes & Noble was a public company and its stock was cratering. OK, so Barnes & Noble is a public company. If you're a shareholder of Barnes & Noble, you're freaking out. Something has to change.
--:-- Nilay Patel: What changes? So what happens is what happens to a lot of distressed companies lately. A private equity company called Elliott Management shows up and tells shareholders, hey, we'll just buy this company from you. We'll pay a premium over the existing stock price. You can cut your losses. You can get out. And we'll fix the company. And we'll take it public again once we've fixed it.
--:-- Nilay Patel: Elliott hired a CEO named James Daunt, who has, by all accounts, completely revitalized Barnes & Noble.
--:-- Nilay Patel: The guy hired a CEO by the private equity company. You talked to him earlier this year for Decoder. Who is James Daunt?
--:-- Nilay Patel: I think this is the smartest thing that Elliot did. James is an independent bookstore owner. And I'm a bookseller. I love bookstores. I think bookstores have a real importance within communities and a value in their own right. And therefore, keeping them alive and prospering was really important.
--:-- Nilay Patel: Usually private equity companies show up and they hire financial guys. Yeah. They hire business people. They hire M&A experts. McKinsey types.
--:-- Nilay Patel: James owns his own bookstore and then he was also the CEO of a larger chain of bookstores in the UK called Waterstones And he won let his store become part of Waterstones He wants to know what it like to be an independent bookseller
--:-- Nilay Patel: Evidently, my first and true love is my own bookstores. So you compete with yourself. I compete with myself.
--:-- Nilay Patel: James's point is, look, Amazon exists. Amazon is a bigger problem for books than Barnes & Noble ever was. So we have to provide much better services. We have to provide much better selection. And the role Barnes & Noble can play in the entire ecosystem is having enough purchasing volume and storage capacity and retail and distribution relationships that independent bookstores can also use.
--:-- Nilay Patel: The reality for booksellers is that you need all of the infrastructure, independent booksellers, that is. You need the infrastructure from publishers, all the distribution and the reps, and focus on physical bookstores to survive. And that's really only there because there's this great huge chain. Waterstones in the UK, Barnes & Noble in the United States.
--:-- Nilay Patel: So, no, as an independent, one looks at now, looks at these big chains as a friend, not an enemy.
--:-- Nilay Patel: His entire approach is to just let the bookstores be local bookstores. And this has worked because they're now more engaged in their communities. They're stocking books that their communities want. And people in those communities are coming to Barnes & Noble locations as what you might call third places. They're coming to hang out, talk about books, have a community around books, and then buy books, which is pretty important if you're a bookshop.
--:-- Nilay Patel: All right. So he's a Tom Hanks. He's a Meg Ryan. We like both of them.
--:-- Nilay Patel: What steps does he take? Is it all rosy? It's not all rosy, but I think change is very hard.
--:-- Nilay Patel: So if you have this big company that was built to compete with Amazon, that was trying to do everything, and you want to make it a smaller, different company, you have no choice but to cut costs and make it a different company. And James cuts a lot of costs. Make no mistake.
--:-- Nilay Patel: He shows up and says, why do I have gigantic central purchasing functions? Why do I have expensive real estate in New York City for executives and office staff? Why do I have an entire division of this company that is effectively selling space in the stores to publishers?
--:-- Nilay Patel: And the biggest decision that he makes is he cuts that revenue line where publishers were paying to have prime placement in the stores. And he says, no, I've got to turn that back to the individual bookstore managers, the individual bookstore teams, and they get to pick what is prominently displayed in the store and what is not.
--:-- Nilay Patel: and we will not take that money. And so he's got to cut all of that down.
--:-- Nilay Patel: From a head office perspective, there's nothing personal when you have one of these sort of great huge ructions. It's not saying, you know, no, you're useless. Off you go. I think you're a bad bookseller, bad buyer, bad merchant, bad whatever. We're saying, look, guys, we're simply stopping doing a very significant amount of what we used to do.
--:-- Nilay Patel: You can see a vision there beyond, we have to cut costs and increase revenue. The vision is I need to empower these individual bookstore teams. And I think that has made the bitter pill of the cuts and the changes easier for the entire company to swallow and certainly easier for Barnes & Noble's customers to swallow.
--:-- Nilay Patel: All right. So four years later, how well are the changes working? And if it's no longer a public company, normally we'd look at the stock price, right? And we'd say, oh, they're doing great or they're doing badly.
--:-- Nilay Patel: How well are the changes working? And how do we know whether they're working well or not? By all accounts, they are working well, right? And you can see that Barnes & Noble is expanding. They're expanding their locations. They are renovating some of their stores.
--:-- Nilay Patel: What about sales? We don't know because we don't have access to financials, granular sales data. It's just hard to know. The company isn't saying.
--:-- Nilay Patel: What we do know is that publishing is doing really well. And the things that we're supposed to kill it are actually accelerating momentum in publishing.
--:-- Nilay Patel: So TikTok is the great enemy of all media, but BookTok is accelerating sales of books all over the place.
--:-- Nilay Patel: Let's talk about some of my instant buy authors, a.k.a. authors who have not once let me down. One thing that truly haunts me is the fact that I will never be able to read everything I want to read.
--:-- Nilay Patel: Five out of five, a bajillion out of five. It is so good. It is perfect. Everything about it, it's like the best book ever.
--:-- Nilay Patel: Which is fascinating. If you think about what's supposed to happen, which is one, the kids stop reading because they're on TikTok all day. And two, the Internet makes local physical retailers completely obsolete.
--:-- Noel King: In the second half of the show, Neelai, we're going to talk about private equity and why it's so controversial. But in your interview with him, you really pushed Daunt on the mechanics of how he took over at the behest of this private equity firm.
--:-- Noel King: Right. So, you know, my rude retelling of this is the cutthroat version. You bring in a CEO from a different country who also is the CEO of another giant bookstore. And he says, I'm going to cut costs and I'm going to change the way a company runs. And what people naturally think is, oh, we're going to do more mergers. This is the history of Barnes & Noble, right? We're going to merge Barnes & Noble and Waterstones. Maybe we'll eat your own independent bookstore.
--:-- Noel King: And his response to this was, no, that's not what we were doing. And I sat around talking to book people, to bookstore managers and the people working in the stores saying, you have to be in charge. And I fundamentally think having done many, many episodes of Decoder, that the most powerful thing a CEO can do is actually tell the people they work for that they are in charge and accountable for what happens, as opposed to being sort of imperial and saying, I've got to cut costs. I'm just making decisions.
--:-- Noel King: and you know you can listen to the episode james says people push back on this they said this is hard we just want to sell books and he said well there won't be a company if you don't figure out how to sell books to your community and i that is the difference between i think his approach at barnes and noble and every other private equity story that i think you can tell
--:-- Noel King: So you are kind of in love with him i i think i love a british accent um i think that's that's real anyone's convincing if you have a good British accent.
--:-- Noel King: I love a nerd. And I think what you can get out of James is that at his core, he's a nerd for books. And I'm happy for companies to exist that are run by people who are passionate about what they do and excited to make better experiences for other people.
--:-- Noel King: I think a lot of companies aren't. I think a lot of companies are passionate about making money or dominating their competitors. And what you get out of James, if you listen to this episode, is the man really cares about people reading books. And if you can build a business around that, that's pretty good.
--:-- Noel King: That's Nilay Patel. Coming up, acquisitions and mergers.
--:-- Noel King: Somewhere over the rainbow sky is all blue Thank you I wanted it to be you I wanted it to be you so bad.
--:-- Noel King: Support for today's show comes from Adio. What is Adio? Adio is an AI-native customer relationship management system built specifically for the next era of companies.
--:-- Noel King: They say it's extremely powerful, adapts to your unique data structures and scales with any business model. According to Adio, Adio takes less than a minute to set up, and within seconds you will have your email and calendars synced. You'll see all your relationships in a fully-fledged platform, they say, all enriched with that actionable data.
--:-- Noel King: And they say you can build AI-powered automations and use its research agent to tackle some of your most complex processes to seize so that you can focus on what matters, building your company.
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--:-- Noel King: explained.
--:-- Noel King: Support for this show comes from Macy's. It's almost fall, and that means it's time to cycle your wardrobe to the cold setting. Because while everyone loves a breezy summer outfit, let's be real. Layering is even more fun.
--:-- Noel King: That's why Macy's Fall Fashion Guide has everything you need to piece together the perfect look for you. It's your one-stop shop for fall's latest trends and must-haves. curated by their experts.
--:-- Noel King: Add a statement shoe to your collection, like the calf hair loafers from Steve Madden, or tap into your romantic side with flowy dresses from Cece and sheer pieces from INC.
--:-- Noel King: You can even throw in some textural layers for contrast, like a faux fur bomber jacket from Karl Lagerfeld Paris.
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--:-- Noel King: Find the perfect layering pieces for you by exploring the Macy's Fall Fashion Style Guide. Shop in-store or online at macy's.com.
--:-- Noel King: Support for the show today comes from Life Kit, the podcast from NPR.
--:-- Noel King: What's in your life kit? I'm asking. They didn't ask that. Every day you have to make choices that might shape the direction of your life, but you can't flip to the back of the book to find an answer key.
--:-- Noel King: Instead, you can listen to the Life Kit podcast from NPR. Life Kit offers real stories about common issues like relationships, finances, parenting, and your career.
--:-- Noel King: If you're looking to move with more intention or just need thoughtful guidance on living better, Life Kit delivers strategies to help you make meaningful, sustainable change.
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--:-- Noel King: Enough from me. Go listen to the show Life Kit. It's a podcast from NPR. Do you mind? I bet you read that book every year. I bet you just love that. Today it's planned.
--:-- Noel King: Brendan Ballew is author of the book Plunder, Private Equity's Plan to Pillage America. Brendan is also a federal prosecutor who wants us to know that he is speaking here in a personal capacity and not on behalf of his employer.
--:-- Brendan Ballew: However, it was his day job that got him interested in private equity in the first place. So I became interested in private equity while working at the Justice Department Antitrust Division, where so many acquisitions were going on that appeared to be by businesses that I had never heard of.
--:-- Brendan Ballew: The buyers for Toys R Us were a trio of investors, KKR, Bain, and Bernado. I want to be a Toys R Us kid.
--:-- Brendan Ballew: Firms like Carlisle and Blackstone and KKR, firms that maybe your listeners have heard of, but if you're like me, probably not. These are private equity firms.
--:-- Brendan Ballew: And as I started to dig into them, I learned that they were buying up huge swaths of American industry. Private equity firms have been acquiring physicians' practices and medical operations at an increasing rate over the last decade.
--:-- Brendan Ballew: Large corporations and private equity firms are buying up veterinary offices. Investment groups, some outside New Hampshire, are buying New Hampshire manufactured home parks.
--:-- Brendan Ballew: Okay, so what is private equity? How does it work? So private equity is something probably all of your listeners have heard of, but maybe feel, if you're like me, a little guilty for not knowing exactly what it does.
--:-- Brendan Ballew: But the business model is very simple. Private equity firms use a little bit of their own money, some investor money, and a whole lot of borrowed money to buy up businesses.
--:-- Brendan Ballew: They then try to make financial or operational changes to these businesses with the aim of selling them for a profit a few years later.
--:-- Brendan Ballew: So it's a very simple idea, but for reasons that I'm sure we'll talk about, it often leads to bad consequences for those businesses, for their consumers, and for their employees.
--:-- Brendan Ballew: Okay, so let's talk about how it works when it's working. I think the best case scenario for private equity is that it brings professional management and operational skills to a business, necessary capital and needed focus to execute on a given strategy.
--:-- Brendan Ballew: And that by doing that quickly in a matter of years and then flipping the company, they can sort of energize businesses in a way that sort of slow-moving public companies or intergenerational family companies might not be able to.
--:-- Brendan Ballew: That's the argument in favor of private equity, at least.
--:-- Brendan Ballew: Have private equity firms always been around? Are they a new development? You know, it's a great question.
--:-- Brendan Ballew: So, you know, there's always been something a little bit like private equity in the idea of buying up businesses with a little bit of debt and then trying to change them and sell them.
--:-- Brendan Ballew: I'd say that the idea of private equity, or what's otherwise sometimes called the leveraged buyout, really began in the 1970s.
--:-- Brendan Ballew: And if I can get in the weeds here just a little bit. Oh, you love the weeds. Yes. What happened here is the Carter administration reinterpreted a law called ERISO, which regulates pension funds and retirement plans and so forth, and said that for the first time pension funds could start investing in riskier assets
--:-- Brendan Ballew: And those assets included what were called leverage buyouts The idea that you buy up a business with debt and then sell it for a profit a few years later.
--:-- Brendan Ballew: So it created a new market for this kind of business strategy. You couple that with changes in the capital gains rate and a long period of low interest rates. And suddenly this idea of buying companies with debt becomes possible in a way that it wasn't before.
--:-- Brendan Ballew: I'd say to get back to your original question, you know, when did this take off? I think probably the shining first example would be Gibson greeting cards.
--:-- Brendan Ballew: What's the nicest thing you could do today? Choose a Gibson card, send it on its way. President Nixon's former Treasury Secretary, William Simon, along with a few other investors, put up $1 million on their own, borrowed $79 million, bought Gibson greeting cards, and flipped it just 16 months later.
--:-- Brendan Ballew: Simon himself made, I think, something like $60 million on a less than $350,000 investment in under two years.
--:-- Brendan Ballew: David Rubenstein, who went on to found the Carlyle Group, said something to the effect of, I didn't know what a leverage buyout was before that deal, but it sure sounded a lot better than practicing law.
--:-- Brendan Ballew: And he went on to found one of the largest private equity firms in the world.
--:-- Brendan Ballew: Why is private equity, I mean, the title of your book is Plunder. Why is private equity bad in your view?
--:-- Brendan Ballew: I think that there are three basic problems. One is that private equity firms invest typically just for a few short years, three or five or maybe seven years.
--:-- Brendan Ballew: And what that means is you tend to take a fairly short-term perspective on the businesses you buy. It discourages you from investing in research and development, in R&D, in your own employees, and so forth.
--:-- Brendan Ballew: So I think that's the first problem. The second one is that firms often load up companies with a lot of debt, as we were just talking about, and extract a lot of fees, things like transaction fees or management fees, which are paid for by the companies they buy for the privilege of being owned by the private equity firm.
--:-- Brendan Ballew: And then the third problem, and I think this is maybe the most important, but is the least understood, at least in the general public and by many folks covering the industry, is that private equity firms are very good at insulating themselves from legal liability for the consequences of their portfolio company's actions.
--:-- Brendan Ballew: And so what that means is private equity firms can essentially control the operations of their businesses. But when something goes wrong, when a patient dies, when a customer is defrauded, when an employee is discriminated against, it's going to be very, very hard to hold the private equity firm responsible.
--:-- Brendan Ballew: And so what that means is if you combine all those problems, short-term thinking, reliance on debt and fees, insulation from liability. You have a business model where private equity firms can capture all the benefits when things go well, but can essentially walk away when things go poorly.
--:-- Brendan Ballew: So you've just laid out all of the reasons that private equity might not be the best way to do business, but does it actually affect people?
--:-- Brendan Ballew: So when we look at the statistics, private equity firms, when they buy businesses, those businesses are 10 times as likely to go bankrupt as similar businesses that aren't bought by PE firms.
--:-- Brendan Ballew: When private equity firms got interested in retail, they were responsible for an estimated 600,000 job losses over a 10-year period when the industry as a whole was gaining jobs.
--:-- Brendan Ballew: And in nursing homes, another industry that PE firms are particularly interested in, private equity ownership is responsible for an estimated 20,000 premature deaths over a 15-year period.
--:-- Brendan Ballew: You want your doctor to be the advocate for you. And if they have this business interest over their shoulder, they may not be able to make the best decision for you.
--:-- Brendan Ballew: In the first half of our show, Brendan, we talked about Barnes & Noble and how it seems like a private equity firm came in, turned a failing bookseller around using some very smart tactics.
--:-- Brendan Ballew: When you look at a story like Barnes & Noble that appears to be successful, do you think there's something else going on behind the scenes? Or do you think in some cases private equity really does work?
--:-- Brendan Ballew: Oh, absolutely. I don't want to overstate my case here and say that every private equity acquisition is going to end in disaster. I certainly think that there have been stories where private equity firms have made investments that resulted in successful companies.
--:-- Brendan Ballew: And they have been rightly touted. I think the analogy here is a little bit like the Ford Pintos of the 1970s, you know, these cars that, you know, if hit were reliable to explode. It wasn't that every Ford Pinto exploded that made it unsafe at any speed.
--:-- Brendan Ballew: It's that enough of them exploded that it was a dangerous car. I think it's a similar thing here, which is because of our laws and regulations, the incentives we've got around private equity, it tends to lead to more dangerous outcomes for businesses.
--:-- Brendan Ballew: And so if we can go back to those original problems that we were talking about, investing for the short term, reliance on debt and fees, insulation from liability, if we can change those incentives through regulations at the federal, state, and local level, We can turn private equity firms into a much more productive part of our economy.
--:-- Brendan Ballew: And Americans love regulation. And usually private equity, these big firms, they have to do what we think is right. So I think you've solved it.
--:-- Noel King: Brendan Ballou. The book is Plunder, and there is some interesting stuff in there about private equity actually liking regulation, Brendan points out.
--:-- Isabel Angell: produced and Matt Collette edited today's show.
--:-- Laura Bullard: fact-checked it and Patrick Boyd: engineered it.
--:-- Noel King: I'm Noelle King. This has been Today Explained. Thank you.
