This long-standing idea holds wide allegiance. It deserves a look by the Myth Buster. The premise is that larger organizations fall harder than smaller ones. Huge bankruptcies cause the big splash – thousands out of work, great sums of money lost.
Early in 2015, the biggest US bankruptcy of the year is the $16 billion by Caesar’s (CZR) , the gambling overseer. The Caesar’s predicament is tied in part to the woes of Atlantic City where four casinos closed in 2014. Caesar’s is also a sizeable presence in Las Vegas, which has escaped the dire fate of Atlantic City.
The Wall Street Journal reported that the private-equity owners of Caesar’s–Apollo Global Management (APO) –have shifted assets to deter creditors from collecting. An immediate irony shows itself. The bankruptcy proceedings will take place in Chicago instead of Delaware, the preferred venue of the creditors. According to the WSJ, Chicago may be more hospitable to protecting the parent company’s assets. The irony is that Delaware’s expansion into the casino business is one of the reasons for the collapse of Atlantic City and the bankruptcy of Caesar’s. As further irony, the Delaware gambling operation, which was supposed to halt the bleeding of easy gambling money driving up I-95 from Delaware to New Jersey, appears near bankruptcy and may receive relief.
In terms of the myth, Caesar’s is not so much falling hard as sort of floating downward. Legal and financial wrangling including asset shifts represent a bunch of softer falls. Perhaps we should place odds on the outcome.
Windmills: Gone With the Wind!
Thanks to rising supply, oil prices have fallen hard. In previous entries, the Myth Buster looked at windmills and pointed out the improbability of their ability to seriously challenge fossil fuel or nuclear-generated energy on a large scale. The recent slide in oil prices surely must have a devastating effect on windmill companies. According to The Daily Caller, one in four wind turbine companies has failed in the last two years. Yes, they used the cliché: Gone With the Wind. Investors will note that the industry has been on a big slide for years. But does this represent a hard fall?
Federal tax credits keep the industry going beyond the dictates of a free market. So, the possibility of the end of these writeoffs (some would say rip-offs) is warding off new entrants and speeding the departure of others. Thanks to an extension of these writeoffs, windmills, which look like the ultimate hard fall candidate, are also dying a slow death, their propellers turning slower and slower. Even parts of the world that seek to escape fossil fuel costs are turning from windmills. But, in terms of the myth, no hard fall here.
The woes of windmills – not including the Vincent Van Gogh variety – parallels the slump in tar sand production. This expensive way to produce oil makes sense at $100 a barrel and above. Shell announced recently that it will hold off on building a huge tar sand plant in Alberta. The new plant would have almost doubled Shell’s tar sand production. In terms of the myth, this too is not a hard fall, just a slow walk backwards.
So far, they myth is not doing so well despite its visceral appeal. But, the Myth Buster will keep looking. Among the largest bankruptcies this year is Radio Shack, ranking third year to date. Not a massive organization at roughly $2 billion, its fall may not be so hard. With apologies for what will appear to be piling on Radio Shack, its name alone suggests a South East Asian bar from the 1940s. Or, maybe a location from a lost Ernest Hemingway novel about World War I. Imagine someone finding a manuscript in an attic: “Leo stood in the Radio Shack His binoculars were clenched in his fist. The Germans were advancing. He took a sip of grappa. He said he did not like grappa.”
There is no secret on why Radio Shack is falling. In an age of fast moving technology, their technology is woeful. Their product lines have descended to aerials, radios, batteries and telephone plans – based on the Myth Busters last ten visits – to buy batteries, aerials and radios.
Surely a sign of a hard fall would be thousands losing their jobs. The most dramatic example of the last six years was General Motors, which laid off 47,000 in 2009. This was the tip of the iceberg as mighty GM went bankrupt. But even here the fall was muffled. GM’s Initial Public Offering (IPO) the next year created a smaller and more profitable company. In addition, even the blow from this massive job cut was deadened considerably by the $51 billion dumped into the failing General Motors by the US government. That total was more than double the size of their successful IPO and enough to soften the fall.
Don’t expect Caesar’s or Radio Shack to get similar bailouts. It isn’t that the government isn’t willing to put $6 or $8 billion into the aerial-radio seller. Radio Shack does not have enough employees to justify such an “investment.” As far as Caesar’s is concerned, the government would be shooting itself in the foot. The government has taken over gambling in the US? The IRS withholds 25% of lottery pots. Because of the size of the winnings, lottery winners almost always owe 35% in taxes to the federal government alone. Then the states pile on.
The myth is not doing so well. Ironically, it appears that smaller flops such as Radio Shack may hit the canvas harder than the giants. The big disasters often have the government writing checks or sharp hedge-fund managers shifting assets faster than creditors can claim them.
Next month. The Myth Buster will continue the investigation into this intriguing notion from the world of business.
Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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