By Robert Williams, Founder Wall Street Daily
S&P 500 companies are on pace to collectively grow by 8% and pocket $964 billion in profits this year.
With such favorable tailwinds, it would take a titanic effort to go belly-up.
Nonetheless, the following five parties still managed to crash and burn in epic fashion…
Bankrupt: October 6, 2014
Those were some of the words used to describe the totally out-of-the-blue bankruptcy of GT Advanced Technologies on October 6.
After all, this was a company whose fortunes were seemingly lined up perfectly. Last November, the maker of synthetic sapphire signed a lucrative, multi-year deal with Apple (AAPL).
The two firms partnered on a massive sapphire production facility in Mesa, Arizona, with many assuming that GT would supply sapphire screens for future iPhones. Sapphire was thought to be virtually unbreakable and scratch-resistant – an upgrade over the current Gorilla Glass. Apple already uses sapphire glass in the iPhone camera lens and fingerprint scanner.
But GT shares tanked last month, following confirmation that sapphire screens weren’t in the iPhone 6 or iPhone 6 Plus, as many had predicted.
Not only that, the Apple-GT relationship has completely collapsed.
However, news of GT’s consequent plunge into all-out bankruptcy rocked the market and took everyone completely by surprise.
Gilford Securities’ Nimal Vallipuram called it “utterly unexpected… this outcome is radical and totally unanticipated.”
Lawrence Creatura, a Fund Manager at Federated Investors, said, “I can’t recall one like this before. Ordinarily, bankruptcies are a slow death by a thousand cuts. This one is unusual in its suddenness.”
Bill Feingold, Co-Founder of Hillside Advisors, stated, “This is off the charts… to go into bankruptcy in one fell swoop, you simply don’t see it.”
Having closed at $11.05 on October 3, GT shares crashed to just $0.80 on October 6. It destroyed the company’s valuation, with the market cap collapsing from $1.5 billion to $175 million.
So what happened? There are a couple of theories…
~ Mo’ Money… Mo’ Problems: The deal included a $578-million loan from Apple for GT to equip the Mesa factory, paid in four installments. But Cowen & Co. analyst, Jeffrey Osborne, told Business Insider that Apple “had the ability to call the interest-free loan back – and it appears they’ve done that.” Apple delayed its third payment, and the final one was never made, likely because GT didn’t meet certain sapphire production targets. But it seems odd that the deal simply wasn’t renegotiated.
~ Sapphire Sucks: While Apple’s upcoming smartwatch will reportedly have a sapphire screen, reports have cast doubt on the material’s unbreakable qualities. Analyst Tim Bajarin wrote in Time Magazine that “sapphire was never targeted for the iPhone 6 and its role in future iPhones hasn’t even been decided yet.”
He says there are several problems. Primarily, sapphire costs 10 times more than a sheet of glass. Sapphire is also thicker and heavier than glass. So consumers would be paying more for a heavier product. In addition, sapphire also isn’t as transparent as glass, so forcing light through the screen would require more energy – and more battery power.
Oh, and it’s apparently not stronger than glass, after all, and doesn’t prevent cracks when dropped.
Either way, not having sapphire screens is a crushing blow to GT.
So crushing, in fact, that in an incredible step, the company will shut down its entire sapphire production operations by December 31.
Citing Apple’s “oppressive” and “burdensome” terms, GT says it’s enduring a “liquidity crisis” and the “daily cash burn in excess of $1 million for the benefit of Apple isn’t sustainable.” The closures will cost 890 jobs.
In the meantime, GT CEO, Thomas Gutierrez, cashed out $160,000 worth of his shares the day before Apple’s iPhone 6 announcement – just before GT shares tanked. And COO Daniel Squiller, who oversaw operations at Mesa plant, also sold off $1.2-million worth of his shares when trouble began in May, followed by a further $750,000 in the ensuing months.
It’s no wonder that investors have filed multiple lawsuits against GT and its executives, alleging fraud, false and misleading information, and other wrongdoing.
GT went “all in” with Apple – and failed spectacularly.
Energy Future Holdings
Bankrupt: April 29, 2014
In 2007, Energy Future Holdings bought TXU Corp. for $45 billion, the largest leveraged buyout in history. The deal made Energy Future Holdings the largest power producer in Texas… but the timing couldn’t have been worse.
With more than $40 billion in debt, Energy Future Holdings gambled that natural gas prices would rise. In Texas, electricity rates were tied to natural gas prices at the time, so it stood to profit handsomely if its gamble paid off.
But natural gas prices plummeted, falling 38.6% between the buyout and the bankruptcy filing, and the firm found itself in dire financial straits. On April 29, Energy Future Holdings filed for bankruptcy. It was the eighth-largest bankruptcy case in U.S. history at the time.
Sbarro and Quiznos
Bankrupt: March 10, 2014 and March 14, 2014, respectively
Forget fast food… how about fast bankruptcy? In the same week back in March, both Sbarro and Quiznos filed for bankruptcy.
Remarkably, it was Sbarro’s second filing in just under three years. The pizza chain had bet heavily that Americans would continue shopping at malls and, therefore, eat at food courts. But mall foot traffic has fallen by double digits for at least the last four years, according to ShopperTrak. As The New York Times put it, Sbarro’s business model was “selling mediocre pizza at the right place at the right time.” Unfortunately, the company missed on the “time” and “place” aspects.
Meanwhile, Quinzos – which once had more than 5,000 stores and was a legitimate rival to the ubiquitous Subway – has failed to make its toasted subs relevant in a tight market. Subway now boasts more than 40,000 locations worldwide, while Quiznos has barely 2,000. The Denver chain is seeking to eliminate $400 million in debt and re-organize its franchisees, but consumers have spoken.
Endeavour International Corp.
Bankrupt: October 10, 2014
Houston-based Endeavour International, an oil and gas exploration and production company, filed for bankruptcy earlier this month after extensive negotiation with its bondholders.
Endeavour had invested heavily in two North Sea projects – Rochelle and Bacchus – but faced cost overruns when the projects were delayed by more than a year. Explaining the projects’ failed timelines, the company cited “unexpected events” over the past three years, including “natural disasters, unforeseen operating issues, delays in new production… and difficulties particular to the North Sea.”
Maybe it’s just me, but I’d expect a North Sea energy exploration operation to be prepared for wild North Sea conditions.
On top of that, falling energy prices significantly damaged Endeavor’s expected cash flow and operating margins. And in order to maintain its ownership rights to Rochelle and Bacchus, it incurred even more debt at a “high cost of capital.” Eventually, Endeavour was left with a $1.2-billion debt and a bankruptcy filing.
Bankrupt: October 21, 2014
Wyly by name… and by nature.
Dallas tycoon, Sam Wyly, faces up to $400 million in penalties after a federal jury in New York found him guilty of securities fraud over 13 years. The devious deception involved creating a variety of offshore subsidiaries and trusts in the Cayman Islands and Isle of Man, which he and his brother, Charles, used to hide stock holdings. Total profits: $550 million.
Now, with a haul like that, you might wonder why Sam Wyly needs bankruptcy protection. But his lawyers say it’s due to “the massive costs of investigations and then litigation.”
Charles Wyly died in a car crash in 2011, which leaves Sam footing the bill from himself and his brother’s estate.
Wyly will owe around $198 million to the SEC, plus an unspecified amount to the IRS.
It’s a far cry from the heady dot-com days, when the Wylys flourished by building several profitable companies, such as Sterling Software, which they sold for $4 billion. Wyly also owned Michaels Stores, which he sold for $6 billion.
But the brothers funded their lavish lifestyle through deceit, using secret stock sales stashed offshore to buy ranches, condos, art, and jewelry.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
Courtesy Robert Williams, at Wall Street Daily (EconMatters article archive Here)
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