Saturday, February 09, 2008
Bankruptcy of the Day: The road less traveled
The existing stock will be canceled and stockholders will receive nothing.
Another household name—Allied Van Lines, the mover, along with its parent corporation Sirva, Inc. and some 56 other companies under the Sirva umbrella—went before a federal bankruptcy court last Tuesday humbly beseeching protection from its creditors while it reorganizes. The problem was simple: It's assets, which presumably include the CEO's desk, totaled $924.5 million and its debts came to $1,230 million—a shortage of $305.5 million if you assume that someone will buy the desk at market value.
If you drop the zeroes and shift the decimal point two places to the left, it looks like my bank account. The last time when through some simple oversight my finances got out of hand, my bank's customer-service representative looked at me reproachfully through her chain-linked bifocals and noted that I appeared to be broke and overdrawn. I offered her my smelly shirt, which I thought should about cover it, but she insisted that it would be necessary to charge me a $35 fee for the service of allowing me to remain in that condition. When a corporation finds itself in my shoes, it is reported as a "liquidity crisis."
Over 50% of the company is owned by two investment funds, almost a third being under the control of Clayton, Dubilier & Rice (CB&R let's call them). On Tuesday Sirva's stock closed at 1.4¢ a share. (I hope you didn't buy any, because if the court approves the bankruptcy you will lose your pennies.)
Before you get out your hanky to mourn CB&R's loss, you should be aware that it was CB&R that conglomerated Allied Van and other viable firms into Sirva, at the cost of thousands of jobs. This new lean and "efficient" entity was then offered to the public in 2003. CB&R undoubtedly made a bundle through that initial public offering and has likely collected generous fees for their wise management of the funds holding the stock. But Linda Lipps notes that "From its beginning as a publicly held company, ... Sirva has lost money."
This is what is admiringly referred to as "creative capitalism." But to the unsophisticated and naïve observer it may appear that functional businesses were bought and exploited at the expense of their employees to produce a nonfunctional entity from which the organizers could make a considerable buck. Happens all the time. So let me warn you that it is thinking like that that can lead to cynicism, not to mention socialism.
Let me say in CB&R's defense that not only did it get rid of a number of useless employees, it also performed the invaluable work of recharacterizing the companies' mission. Where we used to think of Allied Van as a "mover," which connotes sweaty men and boxes, CB&R upscaled the mission to offer "relocation services" to just about anywhere outside North Korea. This "total package" was then offered to companies such as Chevron, which must whisk its executives about the world at a moment's notice as the war for oil demands. (More about those relocation services in a moment.)
According to Patrick Fitzgerald and Marie Beaudette,
The company's trade creditors and customers will be paid in full in cash, but general unsecured creditors will recover nothing.
Who might those general unsecured creditors be? I was able to locate only one name—the United Kingdom Pension fund, which Sirva was into for $31.8 million. Some old Brits may just have to live on less. (See "Maggie Thatcher's pension nightmare.")
The secured lenders will take 75% of the stock of the reorganized company as partial compensation. The bank of J.P. Morgan Chase & Co. and others lending the money to finance the bankruptcy will receive the remaining 25%.
Allied Van will continue to roll throughout the settlement.
What went wrong?
When a moving company faces bankruptcy you might suppose it's because people aren't moving. And to some extent that's true. Alex Markels reports that "the market's van lines segment is down 6.3 percent year over year, according to the latest data from the American Moving and Storage Association."
But the first account I read of the bankruptcy came from the AP, which wrote—
... the company's relocation services business has been slammed by the downturn in the U.S. housing market.
"Specifically, declining home prices have increased the number of homes the debtors have been required to purchase and subsequently sell for a loss," Sirva said in court papers.
What on earth is that about, I wondered? Why would Sirva buy houses? The Reuters account wasn't any clearer. Finally the Wall Street Journal clued me in—
Sirva said some of its relocation services agreements with corporate clients require the company to purchase homes from relocated employees for their appraised value if they're not sold within a predetermined period of time.
As of Jan. 11, the company had about 1,236 homes in its inventory that cost an average of $3 million per month to maintain....
There are a lot of people right now who wish they'd signed up for this service—to buy their home at the appraised value if it doesn't sell! And note that these are executive homes. I'd be surprised if even one of them is appraised at less than half a million.
And who came up with this bright idea? Why, Jim Rogers of CB&R, who is also credited with packaging Sirva and taking it public.
The irony of what happened to Sirva dawned on me. Having promised to sell, or in the alternative buy, the homes of some of its ritziest clients, Sirva stood to lose money every time it moved its customers.
In fact, it occurred to me that Sirva's service may have become an easy way out for owners who stood to lose millions on those overvalued homes. Is your house now worth $2 million less than what you paid for it? No problem. Sirva guaranteed to buy it at the appraised value, so just move on. Sweet!
But surely these are only the thoughts of a wayward mind.
Thursday, February 07, 2008
Headline of the Day
"Euros Accepted" signs pop up in New York City
The falling dollar has undoubtedly been good for tourism, though the rules of entry overwhelmingly favor white Europeans. But people from all over the world will want to come and marvel at What Once Was. Maybe if enough of them come, there'll be money to fix the potholes, at least in the shopping district. Not as noble perhaps as the joint EU–Greek effort to restore the Parthenon, but we must begin somewhere.
Angela Moore and Bill Berkrot quote from a shopkeeper—
Billy Leroy of Billy's Antiques & Props said the vast numbers of Europeans shopping in the neighborhood got him thinking, "My God, I should take euros in at the store."
Leroy doesn't even bother to exchange them."I'm happy if I take in 200 euros, because what I do is keep them," he said. "So when I go back to Paris, I don't have to go through the nightmare of going to an exchange place."
When leaving the country it's always good to have something of value to take with you.
No word yet whether a black market for euros has developed. A step in that direction might go something like this—
SHOPKEEPER (noting a potential customer inspecting a coat): Does Madame like that coat? If I may say—it suits her wonderfully. And it's of the best quality! Made in China, you know.
TOURIST: Mais oui! But it seems a little—how do you say—trop cher!
SHOPKEEPER: Pas de problème, madame. If Madame could pay in euros, I believe we might be able to offer a significant discount.
TOURIST: Ah, monsieur, que vous êtes trop gentil!
Buying a used Mercedes (2/8/05)
Wednesday, February 06, 2008
A technical matter
I made a change to the Simply Appalling template a few weeks ago that made it impossible to leave a comment or link to an individual post while using most of the browsers known to the Western World. My apologies. I've temporarily removed the icons for the social bookmarking services and for Buzzflash while I plan my next screw-up.
Meanwhile I've called in the Blog Squad and asked Alex Edelman to see what he can do with this mess. With any luck there will be some improvements soon.
Tuesday, February 05, 2008
Jingle of the Day
the lawyer’s getting fat,
please put a penny
in the hedge fund’s hat.
—Craig Reeves, director of a hedge fund, writing in January 2005
Reeves was anticipating some degree of regulation of U.S. hedge funds by the Securities and Exchange Commission (SEC) that was to begin in February 2005. However, his concern proved to be unfounded. A federal court in 2006 tossed out the SEC's interpretation of the Investment Advisors Act of 1940 under which it had asserted its oversight authority.
Monday, February 04, 2008
Subprime Fallout of the Day
This past week, as strange as this may sound, Bristol-Myers Squibb [BMS] was the latest company to do the equivalent of taking a charge against cash when it announced a $275 million impairment of debt investments that held such things as surprise! subprime and home-equity loans. —Herb Greenberg reporting in "How 'cash' at companies became risky"
Yes, it's true. Number 129 in the list of Fortune 500 companies—the drug company that makes "Abilify" to control your mania—was itself seized by mania. It played in the subprime market and is now looking at over a quarter-of-a-billion-dollar loss of "marketable securities."
But it wasn't really cash, was it? Greenberg explains—
Companies don't really take charges against cash, of course, but investments that double as cash might as well be cash. Auction-rate securities, as these arcane investments are called, were deemed so safe that they sat on the balance sheet not far from Treasurys in a near-cash category called "marketable securities."
Until a few years ago, before a change in accounting rules, Bristol-Myers accounted for auction-rate securities as actual cash. They are so much like cash that they yield just a fraction of a percent above cash and, as Bristol-Myers regulatory filings say, can "be liquidated for cash at a short notice."
Now their liquidity has congealed into a pill that no one will take, much less buy.
It's all in what you call it
Maybe I should have called this post "Why accounting rules matter," because it's through the accounting rules that the public is hoodwinked. "Accounting rules" for the Movers and Shakers is seen as an insidious euphemism for "government regulation." And they believe in "freedom of the markets," don't you?
So what's so important about calling these investments "good-as-cash"?
As The Wall Street Journal's Karen Richardson pointed out as far back as September, quite a few nonfinancial companies have cash exposed through direct investments in mortgage-backed securities. "Not all cash is created equal," is the way Merrill Lynch put it in a recent report that asked the question, "Are cash investments safe?"
This is important for investors, since a reason people buy technology stocks, and any stock during periods of volatility, is cash on the balance sheet.
It's as if you'd been invited to invest in a company whose assets included a personal check from me.
Fallout beyond finance
Readers of Simply Appalling should have an inkling by now that many banks are in a "parlous" condition, thanks to the unregulated frenzy of the free financial markets in which they've been allowed to participate. But drug companies?
Why would a pharmaceutical company invest in subprime mortgages, you wonder? Well, they had so much money lying about that it seemed a shame to let it just lie there. According to BMS' Chief Financial Officer, they were looking for "a small bump in returns."
BMS is not alone. The CFO said that the company's auditing firm tells him they have "around 70 clients 'who are dealing with issues like this.'" And that's the report from just one auditor.
If BMS wanted to use that pile of money to make more money, maybe they should have invested it in drug research. "Innovation" is what the free market is said to offer. And innovation is the excuse we're endlessly given for why we pay those exorbitant drug prices. From the consumer angle, it appears we're not getting what we pay for. And in certain circles that's known as "fraud."
But not to worry. BMS has learned its lesson and promises not to do it again. Greenberg reassures us—
At Bristol-Myers, at least, don't expect to see auction-rate securities on the books in the future.... There is only so much cash, after all, that companies are allowed to turn into trash.
Preemptive patent infringement (7/13/04)
No Free Lunch gets a table (9/25/05)
Thigh Slapper of the Day (5/11/06)
Many in finance found to be SIV-positive (10/30/07)
Must-View of the Day (11/17/07)
Tautology of the Day (12/18/07)
Pharmaceuticals of the Day (1/15/08)