Going, Going, Gone

Dec. 21, 2004
Expect more manufacturers to declare bankruptcy.

Feeling the effects of a slow-growth economy, alleged unfair foreign-trade practices, and large debt loads, among other forces, an increasing number of manufacturers and other U.S. businesses are likely to file for bankruptcy protection during 2001. How many more, says E. Han Kim, a professor at the University of Michigan's Business School in Ann Arbor, depends on whether the current U.S. economic downturn ends in a soft or hard landing. The harder the landing -- including an out-and-out recession -- the more bankruptcy filings are likely to occur. In 2000, 176 publicly traded companies filed for Chapter 11 bankruptcy protection -- 27 of them manufacturers, reports Bankruptcy-Data.Com, an online service of New Generation Research Inc. The current "poster boy" for financially distressed U.S. manufacturers is LTV Corp., the Cleveland-based steel company that filed for bankruptcy protection during the waning days of 2000. LTV's filing, under Chapter 11 of the U.S. bankruptcy laws, was the ninth time that a major U.S. steel producer had sought bankruptcy-court protection during the last two years, figures the Daily Bankruptcy Review, a news-letter for investors. "The steel industry cases are huge and certainly draw a lot of press," observes Thomas J. Salerno, Phoenix-based cochair of the reorganization and restructuring practice of Squire Sanders & Dempsey LLP, a law firm headquartered in Cleveland. But the steel industry cases are far from the full story. A pride of experts, including management consultants, lawyers, and academics such as Michigan's Kim, expect the field of bankruptcy filings to widen this year. Indeed, in the footwear industry Converse Inc., a leading U.S. maker of sneakers, has at least temporarily lost its competitive bounce. The North Reading, Mass.-based company filed for bankruptcy protection on Jan. 22. "This is far more than a steel-industry phenomenon," stresses Portland, Oreg.-based Melissa Kibler Knoll, a corporate recovery partner in KPMG LLP's global-financial-strategy practice. For example, she says "there are currently several apparel and textile manufacturers that are involved in bankruptcy proceedings, and others [for which] there are indications there might be something happening in the future." Foreign competition will continue to be "a big problem" for U.S. apparel producers, as it will for steelmakers, she notes. "The entire globalization of our economy is one of the things that is not going to change, and that's affecting a lot of these companies." Automotive-parts producers and scrap-metal and metal-refining firms also are possible bankruptcy-protection filers during 2001, says William F. Gray, a bankruptcy partner in the New York office of Salans, a multinational law firm. And, because of continuing legal claims against them, he expects to see some additional companies that once made asbestos-containing products file bankruptcy petitions. Semiconductor makers and some oil- and gas-related businesses also are bankruptcy-protection candidates, adds the Daily Bankruptcy Review. Among nonmanufacturing firms, it counts telecommunications service providers and dot.coms -- no surprise -- as candidates for bankruptcy-protection filings in 2001. Bankruptcy is a technique that companies can use to deal with their financial difficulties "and [it] can certainly have very positive advantages in terms of the companies' survival," states KPMG's Knoll. "But there are also a lot of things these companies can be doing outside the bankruptcy process" to help rescue their businesses, she emphasizes. Focusing on cash, and setting reasonable expectations and meeting them, are two of the "good business practices and techniques" that companies would be well advised to employ, she suggests. In fact, "every manufacturer has to evaluate how to protect their business in this economy and in this credit environment," stresses Dominic DiNapoli, New York-based managing partner of PricewaterhouseCoopers' business-recovery practice. That means, he says, being "honest with yourself" and determining whether or not customers consider your products essential; determining what your customers' inventory levels are; and determining in your own factories whether you must upgrade production systems and equipment now or can put off those purchases. In short, DiNapoli is saying, know yourself. Know your position in your industry. And know your break-even point.

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