STREET LIFE
Breaking Records--For Bankruptcies
Chapter 11 is the hottest fad in business. But that's not even the half of it.
FORTUNE
Monday, July 22, 2002
By Andy Serwer
fortune.com
Enron. Adelphia. Global Crossing. Kmart. Names we know all too well. These are just a few of the biggie companies that have slid into bankruptcy over the past 12 months. And I'll bet you your last dollar that between the time I write this article and the time you read it, we can add another big name to the list. (Kind of reminds me of that old Booker T & the MG's tune, "Time Is Tight," if you know what I mean.)
"It's been growing since October two years ago," says Ray Warner, a professor at the University of Missouri at Kansas City Law School. "You're now seeing some very large examples, which is different than in the past. What we're really seeing is bankruptcies that are being caused by accounting issues. The real trigger for these companies is the loss of financial confidence."
If you're guessing that bankruptcies are going through the roof--or falling through the floor--right now, you're dead right. The scariest, most visible wave, of course, is telecom. Besides Global, we have FLAG, Century, Clariti, Metrocall, Metrofiber, Mpower, Network Plus, NTL, Pinnacle, Rhythms NetConnections, Star, (which is not to be confused with) StarBand, Teleglobe, Western Integrated, Williams Communications, World Access, XO, and my favorites: Yipes Communications and ZeroPlus.com. (The latter two seem almost destined, don't you think?)
But it's not just phone companies. Houlihan's (yup--the restaurant chain) went bankrupt in January. Anchor Glass filed in April. Birmingham Steel in June. Florsheim (I've always been partial to their wingtips) kicked in March. Batterymaker Exide also went down in April. Guilford Mills, Kaiser Aluminum, Polaroid, State Line Casino, and Wisconsin Color Press all threw in the towel. And then--surprise, surprise--there was Beliefnet, "a spirituality-based Internet site," which passed on in April.
It's terrible. Unless, of course, you happen to be Wilbur Ross, CEO of W.L. Ross & Co., who is a dean of distressed investing. "The numbers are really big, and there's no end in sight," Ross says. "We keep track of companies with $100 million or more of liabilities when they file. Last year was the all-time world's record. Companies worth $230 billion filed for bankruptcy. That's up 80% from 2000, and up 11.5 times from the last peak, in 1990." Last year some 172 large companies filed for bankruptcy, says Ross. That's one every two days!
And the beat goes on. "If we don't break the record this year, we'll be within spitting distance of it," says Ross. "If you add up the two years cumulatively, there will be some $500 billion of liabilities in bankruptcies by the end of the year. That's 5% of GDP."
And that's just corporate bankruptcies. The action on the personal side is even faster and more furious. Be it under Chapter 7 (liquidation), Chapter 11 (reorganization), Chapter 12 (family farms), or Chapter 13 (low-income insolvencies), Americans are raising the white flag as never before. In the first three months of 2002, bankruptcy trade group ABI reports, total bankruptcy filings climbed to 379,012, the highest first-quarter tally ever. The overwhelming majority, 369,237, were personal bankruptcies. In other words, 97% of the bankruptcies in this country are personal. That's up from 81% 20 years ago.
A disturbing trend, to be sure. And of course there's much clamor to stiffen personal bankruptcy laws. But at the risk of being callous, I say it's part of the cycle we must endure. I'm not sure what the opposite of bankrupt is--I suppose "incredibly solvent"--but we certainly enjoyed that trend for several years previous. Now the pendulum has swung back with a vengeance, and bankruptcy is in its own boom. I met a new neighbor the other day who told me that he was a lawyer by training who had been working as an executive at a shoe company. "But I'm going back to law," he said. "Bankruptcy law. This is a once-in-a-lifetime opportunity." Sadly, he's right.
States v. Oracle?
Oracle is taking heat--and Larry Ellison can't be happy about it. The QT: Last year Oracle was awarded a $95 million software contract intended to save the state of California more than $100 million in operating expenses. That's fine, as far it goes, except that it actually goes a lot further.
For starters, the contract was given without competitive bids. Meanwhile, a lobbyist hired by Oracle, Ravi Mehta, gave a state official a $25,000 check for Governor Gray Davis' reelection campaign. Yikes. Then a state report charged that Oracle's software would actually waste as much as $41 million of state money. Oracle disputes the study and denies any impropriety.
Now all hell has broken loose. Davis returned the $25,000 and fired the official who accepted it. Mehta no longer works for Oracle and took the Fifth during contentious state hearings. Worse, other municipalities are said to be looking at their contracts with Oracle, which gets 25% of its sales from governments.
In Memoriam
Dan Case passed away the other day after a long illness. Dan was the CEO of Hambrecht & Quist (now owned by J.P. Morgan Chase) and one of Silicon Valley's most prominent investment bankers. He was also the brother of Steve Case, chairman of AOL Time Warner, FORTUNE's parent. I was fortunate enough to have spent time with Dan over the years, and I remember him as great company, warm, supersmart, and charismatic. His family and all of his friends in the world of business will miss him.
Loose Change
Ross Perot may soon be back in the spotlight--but not under happy circumstances. His company, Perot Systems, is being investigated by a California state senator for allegedly offering to help power companies "game" that state's electricity market. The company denies it, and Perot has offered to testify. We're all ears, Ross! Watch Andy on CNN. |
