Why Businesses go Bankrupt: R. H. Donnelley / Dex Media

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R. H. Donnelley filed for bankruptcy in May of 2009 after missing a $55 million interest payment to creditors, but the seeds of its bankruptcy were planted more than five years earlier when Dex Media borrowed $1.5 billion to pay a special dividend to its private equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe.   The two Private Equity firms acquired Dex Media from Qwest Communications International in a 2003 LBO for a total purchase price of $7 billion, and were subsequently able to recoup their entire equity investments of $775 million each through a series of special dividends, as reported by the WSJ on Sept. 21, 2005. Dex Media was taken public at $19 a share in early 2005, and R.H. Donnelley acquired Dex Media  in a cash and stock deal later that year, which also involved R. H. Donnelley assuming $5.3 billion in debt, bringing Donnelley to a total of $10.7 billion in debt.

A look at the S-1 statement for Dex Media’s initial public offering shows that the lead underwriters for the January 2005 IPO were Lehman Brothers, Morgan Stanley and Merrill Lynch, and that the company had an 8-to-1 debt equity ratio on 9/30/2004.  The risks section of the S-1 stated that “our substantial indebtedness could adversely impact our financial condition, and impair our ability to operate our business” and went on to say “despite our substantial indebtedness, we may still incur significantly more debt.” 

Lesson Learned:  Dex Media’s underwriters were right on both counts.   R. H. Donnelley’s total debt load, including the debt assumed in the Dex Media acquisition, deprived it of the needed financial cushion in the face of tough competition and adverse economic conditions.

Why Businesses Go Bankrupt: Shane Company

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Shane Company, a family-owned $200 million jewelry retailer filed for Chapter 11 bankruptcy early in 2009, partly attributing “cost overruns and functionality problems on an SAP software implementation,”  “ComputerWorld” reported.  The company also acknowledged that the recession, and slow holiday sales were the biggest cause of its problems, as sales slumped from $275 million in 2007 to between $207 and $210 million in 2008.  The SAP implementation had cost Shane $36 million by the time they pulled the plug vs. an original cost bid of $8 to $10 million, and had also caused Shane to become “substantially overstocked with inventory, and with the wrong mix of inventory.”  But here’s a question for Shane management: What systems and business practices were they using to manage inventory on their way to becoming a $275 million company, and why didn’t they keep things in place as they were until thoroughly testing the new SAP system, and then cutting over, to protect against the ensuing problems.

Lesson Learned:  Company managers have to take responsibility for the business systems they recommend for purchase and their subsequent implementation.   While competitor Blue Nile was riding out the recession with less than a 6% revenue decline in 2008, Shane’s 25% revenue decline meant there was little or no leeway for a botched  SAP implementation.

Woodstock Panelists Advice to Indy Filmmakers: Don’t Count on Studios’ Specialty Divisions

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Woodstock Film Festival panelists discussing the Future of Independent Filmmaking seemed to agree that the specialty divisions of the major studios are selecting many fewer films for broad theatrical release, perhaps as few as twenty per year.   For independent filmmakers, the current environment is almost like going back to 1975, before the establishment of specialty divisions, such as Fox Searchlight and Sony Classics.  But there is one notable difference between then and  now: the affordability of equipment and editing software has greatly reduced the economic barriers to aspiring filmmakers.   The recession has considerably tightened up funding sources, but for an independent filmmaker who is still able to raise $250 thousand to make a film, it would be responsible to try to raise an additional $150 thousand Prints and Advertising (P&A) funds at the onset, to increase their chances of getting the completed film into distribution, advised panelist Richard Linklater.  One encouraging development is the rise of “service distributors”,  some of whom have previously worked with the studio’s specialty divisions, and now are on their own, and able to provide expertise in independent film distirbution.  In addition to Richard Linklater, the other panelists were John Sloss, Ira Sachs and Peter Saraf, all moderated by Scott Macaulay, the editor of “Filmmaker Magazine.”

Entrepreneurship Down, and Skewed to Low Income Areas

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SBA and Kauffman Foundation studies both indicate that entrepeneurship trended down in 2008.    Business starts were down 14% in the third quarter of 2008 versus the same period a year earlier, Brian Headd, an SBA economist told the WSJ online.   According to Robert Fairlie, a University of California, Santa Cruz, economist, working with the Kauffman Foundation, the number of low income potential new businesses, such as baby sitting and house-cleaning services, grew in 2008, while those with higher income potential did not, suggesting that new business starts were driven more by necessity than opportunity.  The recession is taking its toll: according to a Federal Reserve July survey of 53 lending officers, “more than one third reported tightening terms for small-business loans in the prior three months, while only one reported easing terms.”

Why Businesses go Bankrupt: Tavern on the Green

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Manhattan icon Tavern on the Green filed for bankruptcy under chapter 11 earlier this month, with chief executive Jennifer Oz LeRoy citing “extreme financial distress brought on by the current financial crisis and the City of New York’s decision not to renew our lease, as the dual factors behind the decision.” Described as “more spectacle than restaurant” in the 2008 Zagat guide, Tavern was informed by New York City’s Department of Parks and Recreation on August 28th that its lease would not be renewed, with the new 20-year lease for the space instead going to Dean Poll, who runs the Boathouse restaurant in Central Park.

A visitor to Tavern from Cave Creek, Arizona told Zagat in May of 2009: “The only thing worse than the food was the service!!! Absolutely a waste of time, after such a big build up. Food was bland, served lukewarm, like a low budget cruise ship or Las Vegas hotel. When I asked the waiter about a wine pairing, he pointed at the menu with his pen and rolled his eyes. Absolutely no substitutions or accommodations from the kitchen, [the] waiter explained that the kitchen staff is miserable.”

The kitchen staff probably became even more miserable to hear about the bankruptcy, especially given that Tavern owed $1.7 million to the pension and health benefits funds managed by the New York Hotel & Motel Trades Council, the union that represents Tavern’s 400-plus employees.  Ms. LeRoy, who is hoping for a busy final four months until Tavern’s lease expires at year end, said in a statement that the restaurant plans to honor all of its obligations to its loyal employees.

Lesson Learned: In today’s recessionary environment, customers are looking for tasty food at prices that represent a good value, as opposed to glitzy decor.  As “Entrepreneur” explained in their November 2009 article about new trends in the restaurant trade: “Plush dining rooms, star chefs and menus built around foie gras and truffles feel outdated – while rooms that are simple, with a personal touch, feel right.”