- Compliance check results in underage citations at four Cape bars (7/19/17)1
- Isle Casino to host wide-ranging career fair Wednesday (7/16/17)
- Lying police? Missing files, lost evidence: Newspaper investigation reveals glaring details in David Robinson case (7/16/17)2
- Buffalo Wild Wings to hold fundraiser Wednesday for ailing Cape officer (7/19/17)1
- 49-year-old homicide victim found in Cape (7/20/17)
- Sikeston detective's files about murder suspect missing from DPS (7/18/17)1
- Witnesses make claims of officer corruption in Box/Robinson case (7/17/17)1
- Cape city, civic leaders unveil downtown trolley service (7/14/17)6
- Park official: 5-year-old girl nearly drowns at Cape Splash, taken to hospital (7/12/17)4
- Business notebook: Jackson boutique has regional roots in retail (7/17/17)
Bankrupt firms still pose threat to rivals
NEW YORK -- To most people, bankruptcy means failure, hitting the bottom and having no way out. For companies, it often spells the beginning of the end, and those that make it through are often stigmatized, shrunken and saddled with huge legal bills.
Even so, corporate bankruptcy survivors have some big advantages. After selling off unprofitable divisions, once-reeling companies can head back onto the field virtually debt-free -- giving them new power to keep prices low and make their competitors miserable.
In fact, is bankruptcy too good of a deal?
Ivan Seidenberg, chief executive of Verizon, raised that question recently by complaining he was "on fire -- fire-engine-red mad" that some rivals in the staggering telecommunications industry "think they go into bankruptcy and they will come out of the process in different shape."
Seidenberg, whose company carries $59 billion in debt, called on the federal government to close some failed phone companies rather than let them wipe their slates clean in bankruptcy.
"Fundamentally, what you have is companies using bankruptcy arbitrage to fund their business model," Verizon spokesman Eric Rabe added. "For those of us who pay our debts, that's grotesquely unfair."
With telecom giant WorldCom in bankruptcy after a startling accounting fraud, it seems inevitable that questions would arise over whether it's fair for some companies to be allowed to come back. But many observers share a deeper worry: that each time a debt-burdened telecom company reorganizes under bankruptcy, the odds increase that still-solvent players will have no choice but to follow suit.
Such ripple effects crippled the airline industry in the 1980s. Like airlines, telecom companies must make extremely expensive investments in order to compete. That greatly exaggerates the advantage telecoms develop if they wipe out debts in bankruptcy.
"Right now we have a one-size-fits-all bankruptcy system and perhaps we need to think about having two or more sizes," said Todd Zywicki, a bankruptcy expert at George Mason University who believes capital-intensive industries like telecom might need stricter bankruptcy rules. "There are real concerns here that we haven't thought of previously."
So far, the recent spate of telecom bankruptcies has slashed the value of surviving players' assets but does not appear to have by itself worsened price wars. AT&T is charging more for some services and is trying to capitalize on the tumult by touting its relative stability.
But the full effects may be felt down the road, as more companies that vaporized billions of dollars get back on track after taking cover in court.
That includes Global Crossing, a fiber-optic network company that is under federal investigation for accounting fraud and filed for bankruptcy with debts of $12.4 billion. Two Asian companies that bought 61 percent of Global Crossing for just $250 million say its reshaped successor can be profitable as soon as next year.
Covad Communications, a seller of high-speed Internet access that wiped out $1.4 billion in debt during bankruptcy last year, is aggressively pushing digital subscriber line (DSL) service to consumers nationwide again with a $15 million ad campaign.
Covad chief Charles Hoffman said his Silicon Valley company still has to overcome the tarnish associated with bankruptcy and reassure customers and partners that Covad is healthy. But he also boasts: "We have a great-looking balance sheet -- perhaps the best in telecom."
Corporate bankruptcies in the United States have fallen dramatically in the past two decades, from 82,446 in 1987 to 35,472 in 2000, although they rose to 40,099 last year, according to the American Bankruptcy Institute. There were 19,470 in the first half of this year.
The nation's first bankruptcy law was passed in the 1780s, but it wasn't until the 1930s that companies were allowed to reorganize during the process instead of being liquidated only. A 1978 law gave companies even more flexibility to reorganize.
Bankruptcy experts say that gave the United States a far more liberal policy than the rest of the world, where bankruptcy is mainly a means of liquidating companies rather than trying to save them.
The theory behind reorganization is that it softens the blow to the economy when a company fails, by preserving as many jobs and successful parts of a business as possible. It also is built on the premise that creditors have a better chance of getting something back if they work together and become shareholders of a reformulated company.
"I think the bankruptcy law as we have it strikes a pretty decent balance -- it's not perfect, but it's not horrible either," said David Lynn, a bankruptcy attorney in Washington. "Unless you think a corporate culture exists which fosters the kind of inappropriate accounting practices that took place in the WorldComs of the world. But I tend to think of it in terms of what the individuals did. I don't think the company is itself to be held to blame."
The process certainly doesn't guarantee a fresh start. Even Chapter 11 filings, which let companies pursue reorganization rather than liquidation, have led to the death of big-name companies such as retailers Montgomery Ward, Ames Department Stores and Caldor.
"A lot of companies start out with great hopes of reorganizing and say they're going to come out within a year, but often they close altogether or cut themselves down too much," said G. Ray Warner, a bankruptcy expert at the University of Missouri-Kansas City.
Mindful of such risks, Qwest Communications, a Denver-based phone and Internet carrier with debts of $26 billion and federal questions about its accounting, has been trying hard to avoid bankruptcy by selling off its yellow pages division and renegotiating bank loans.
When Yipes Enterprise Services, a San Francisco-based data-networking company, emerged from bankruptcy this year, newly hired chief executive Dennis Muse told employees not to celebrate their new lease on life. Instead, he asked them to remember what put Yipes into bankruptcy -- "flawed execution" and "failure."
"There should be a stigma associated with bankruptcy," Muse said. "It should not be something companies should be able to use to clean their balance sheets so they can come out of it a leaner, meaner competitor."