9 Big Companies That Will Disappear in 2012
24/7 Wall St.
Jan 26th 2012 1:00PM
Updated Jan 30th 2012 5:05PM
It can come about in several ways: A company can go bankrupt and see its assets sold off. A name may get discarded when a company is acquired. Or a company may cease to exist due to a merger or liquidation.
But who's next? What well-known companies will disappear in 2012?
24/7 Wall St. compiled its list of companies most likely to vanish by focusing on those that are serious mergers and acquisitions targets, those that are weak players in industries with too many competitors for any to become highly profitable, corporations that Wall Street believes are worth more in parts than intact, and generally, those in good old-fashioned deep fiscal trouble.
Theses are the 9 companies that we're betting won't survive to see 2013.
9. Research In Motion
The Canadian-based smartphone company is famous for the BlackBerry -- once the most widely used smartphone in the world. But Research In Motion (RIMM) has been in steep decline for the past year, and the subject of a number of takeover rumors. Suitors supposedly include such notable names as Microsoft, Amazon and Samsung.
Some analysts believe RIM will not be sold because management holds a large enough share of the company's stock to block any buyout. But RIM's co-CEOs, Jim Balsillie and founder Mike Lazaridis were recently replaced, and the new chief could sell the company. On their watch, the value of RIM's shares dropped from $144 in June 2008 to $17 last week, a plunge of 89%.
RIM's flagship BlackBerry was launched in 1999. It became the world's first widely used smartphone, and held the high ground in the business until just two years ago. Since then, successful assaults by Apple's iPhone and an army of Google (GOOG) Android powered smartphones have driven RIM's global market share down to 10% in the third quarter of 2011 down from 20% in 2009. And RIM didn't do itself any favors with a series of product launch debacles.
RIM's earnings and sales have deteriorated significantly for two years. It recently warned it would miss earnings estimates for next year. It also took a $485 million charge in the third quarter due to poor sales and lower-than-expected receipts for its new PlayBook tablet.
Apple's iPad and similar products from large competitors like Samsung have flanked RIM in the tablet business, much as they did in smartphones. RIM's next generation QNX-based smartphone launch has been pushed until the end of 2012, further undermining the company's prospects.
RIM's products have become marginalized, it has lost its ability to operate independently, and its problems can't be solved. The BlackBerry brand may survive, but Research in Motion is too far gone.
8. American Apparel
American Apparel (APP) has been near death several times in the last two years. The most obvious indication that this clothing retailer is in deep trouble is that its stock trades for under a dollar -- down from nearly $17 just four years ago. For a company with annual sales of nearly $600 million, a market capitalization of less than $95 million is extremely low.
As of the end of the third quarter of 2011, American Apparel had only $8 million on its balance sheet. It lost $7 million in the same quarter. The company showed $90 million in long-term debt. Retail same store sales rose only 2%.
In its last 10-K filling with the SEC, American Apparel reported that "there exists substantial doubt that we will be able to continue as a going concern." The company has been through two auditors in the last three years. Last year, Canadian financier Michael Serruya and Delavaco Capital put $15 million into the company, but later indicated they wanted to sell their equity and back out of their investment.
American Apparel is just too small to compete with rivals Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO) and Aeropostale (ARO), and too financially troubled to make it through the year.
AT&T (T) tried to buy the No. 4 wireless company in the U.S. from Deutsche Telekom (DT) in a deal valued at $39 billion, but the Justice Department and FCC put the kibosh on the plan. As a result of the forced breakup, Deutsche Telekom was paid $3 billion and AT&T took another $1 billion charge on spectrum rights.
Even with the extra $3 billion on its books, though, T-Mobile is in an untenable situation. Its customer acquisition programs were undermined by the period when it appeared the company would soon cease to exist. T-Mobile has 33.7 million subscribers. Even troubled No. 3 cell company Sprint Nextel (S) has 50 million. Compare T-Mobile's third quarter 2011 revenue of $4.67 billion to Verizon's (VZ) for the period -- close to $28 billion -- and its income problem becomes obvious.
The other problem for T-Mobile is technological: The future of wireless service in the U.S. is 4G super-fast networks, but many experts say the T-Mobile 4G system isn't 4G at all, and is built on an infrastructure that can't offer true 4G speeds. The costs to build nationwide 4G networks run well into the billions of dollars, and T-Mobile does not have a balance sheet anywhere near as strong as AT&T's or Verizon's to accommodate such an investment. Moreover, Deutsche Telekom will be reluctant to lay out the necessary cash to buff up an operation with small market share and poor prospects.
Now that Deutsche Telekom has shown it is willing to sell T-Mobile, other suitors will emerge. The most likely buyer is Sprint. While it does not have access to $30 billion dollars, Deutsche Telekom would probably fund a deal to put the two carriers together, and T-Mobile will vanish like a dropped call.
Restaurant chain Bennigans saw its sales decline by 88% between 2001 and 2010, from $565 million to $69 million; No coincidence, as it all closed 87% of its stores over the period. It cut about 10,000 people in the process.
Despite that, Bennigans has said it plans a major comeback. The company, which has only 78 locations left, signed franchise agreements with eight new franchisees in 2011 to develop more than 30 new restaurants. It plans to open 12 new locations domestically and internationally in 2012.
But in a world in which successful restaurant chains measure their outlets in the thousands, that's not nearly enough.
Recently, Paul Mangiamele, Bennigan's president and CEO said, "At a time when many companies are cutting back, we are making investments into a strategic plan to rekindle the fire of a great brand. There is a lot of nostalgia, goodwill and pent up demand for Bennigan's that we are bringing into the 21st century with new technology and a renewed customer focus on presenting hand-crafted, signature American fare with Irish hospitality."
That's a bit disingenuous. Successful chains like McDonald's (MCD), Subway, and the KFC and Pizza Hut operations owned by Yum! Brands (YUM) are not cutting back at all. Viability in the chain restaurant business is related to the ability to take advantage of scale and huge marketing budgets. Bennigans has neither. The company is much too small to stage a comeback, or compete with the dozen titans that control the industry. Place your order soon, before the kitchen closes for good.
5. Office Max
Office supply retailers Office Depot (ODP), Staples (SPLS) and Office Max (OMX) all essentially offer the same products and services, and Office Max is by far the weakest of the three. They all also have to compete with much larger retailers, particularly Costco (COST) and the Sam's Club (WMT).
Nothing signals more pessimism about Office Max's fate than the 70% drop in its share price over the last year and well over 80% in the last five. Office Max has more than $1.6 billion in long-term and non-recourse debt.
Margins for the company are razor-thin. The retailer made $30 million in the third quarter of 2011, down from $57 million in the same period the year before, on revenue of $5.29 billion.
Take note: Office Max gave two of its most-senior executives "change of control" agreements just last year. These are typically granted to executives concerned that they'll lose their jobs in a buyout.
In its latest proxy report, Office Max wrote: "Some of our competitors are larger than us and have greater financial resources, which afford them greater purchasing power, increased financial flexibility and more capital resources for expansion and improvement, which may enable them to compete more effectively."
That's a fairly succinct statement of why Office Max is doomed.
The business is too crowded, and margins are too slim, for all three players to survive as standalone companies. Consolidation and the economies of scale it brings are the obvious solution: Office Max will merged with or be bought outright by one of its rivals.
4. American Airlines
Along with its parent AMR, American went into bankruptcy on Nov. 29. At the time, American announced that it would continue conducting normal business operations while restructuring its costs, which probably means dropping aircraft lease obligations and employment levels.
American's ability to trim these costs is actually likely to what leads to its disappearance. News reports indicate that US Airways (LCC), Delta (DAL), and private equity firm TPG are all preparing bids. US Airways is viewed as the most likely suitor. Both airlines competitive advantages when to rivals Delta and Northwest combined to create one of the world's largest carriers, and more recently, when United (UAL) and Continental did the same. US Airways needs to make a similar move remain competitive. So does American.
3. Eastman Kodak
Kodak, the once illustrious film company, filed for Chapter 11 on Jan. 19. It will now either sell or close its business operations, including its digital photography and printing businesses, and become a patent licensing company.
Kodak obtained a $950 million debtor-in-possession credit facility with an 18-month maturity from Citigroup. The company said it believes it has sufficient liquidity to operate during the bankruptcy and to continue providing goods and services for customers. But those operating businesses are losing money, and there's no reason to believe that trend will suddenly reverse.
Kodak lost $222 million in the third quarter of last year as revenue fell to $1.462 billion from $1.756 billion in the same period a year ago. Two of the company's major divisions lost revenue in the period, and posted significant losses. Only one division managed to improve revenue -- by 1%.
Just prior to filing for Chapter 11, Kodak began the process of turning aggressively to patent licensing as its main business. It has attempted to obtain licenses through normal business channels, but as its financial situation deteriorated, it had little leverage to pursue agreements. Kodak sued Samsung for patent infringement in the week before it entered Chapter 11. A month earlier, it filed a lawsuit against Fujifilm, Apple, and smartphone maker HTC. With money in hand as part of its Chapter 11 process, it can now focus on the one segment of its business that has potential; its patents are valued at several billion dollars.
But an intellectual property company has no need for those other, antiquated business operations. Kodak will disappear.
TiVo (TIVO), the original leader in digital TV recorders, now heavily relies on revenue from patent disputes. The company's popular set-top boxes are being replaced by an army of products from video-on-demand operations such as Netflix (NFLX) and Apple (AAPL), and by the cable companies' own DVR offerings.
TiVo's hardware and subscription business is small. In the third quarter, the company's total revenue was only $65 million, and it lost $24 million. TiVo lost customers every quarter for four years running before a very modest increase in Q3. Its global subscriber base is a little over 2 million and partner companies control nearly half of those. The only reason that the company had positive results for the first nine months of the year was patent settlements.
Where TiVo has been successful is in getting royalties for its intellectual property. Its most recent win came after a long patent battle with AT&T (T). The firms have entered into a mutual patent licensing arrangement under which AT&T will pay TiVo a minimum of $215 million.
Last year, TiVo settled a long-standing patent dispute with DISH Network (DISH) and Echostar (SATS), which it had brought when the two satellite providers were a single company. Under the terms of that settlement, the companies were granted licenses to design and make DVR-enabled products. DISH Network and EchoStar agreed to pay TiVo $500 million.
TiVo will almost certainly sell its hardware business to a cable, satellite, or set-top box company, and continue its successful effort to monetize its patents.
The Oprah Winfrey Network, a joint creation of Oprah Winfrey and Discovery Communications (DISCA), was launched into 85 million cable homes at the start of 2011. But while audiences wanted to see Oprah, that's exactly what OWN failed to deliver. Winfrey didn't even begin to appear on the channel until the beginning of this year. Most of its other programming has garnered little interest.
On the day of the network's launch, its audience was approximately 1 million, but it began losing audience share almost immediately. Within days, the figure dropped to just over 300,000. As one one television expert summed up: "Its ranking had been 45th for the first quarter, so dropping to 73rd place for the second quarter shows that ratings are in a free fall. TV Week reports that OWN is in last place among all women-focused cable networks."
The poor performance of Rosie O'Donnell's new program on OWN illustrates just how important Oprah herself is to the network. O'Donnell, already a well-known star, had an audience of 497,000 when the first installment of her talk show aired. Two days later, that figure dropped to 254,000. In November, Winfrey's best friend Gayle King announced that she would be giving up her OWN show. At the time, AOL TV critic Maureen Ryan wrote that "I don't know that OWN is established outside of Oprah. That still has to happen."
When Oprah's own TV show finally launched on the network earlier this month, ratings were lukewarm. The two-hour premiere of Oprah Winfrey's new weekly prime time series Oprah's Next Chapter drew 1.1 million viewers among women ages 25-54. The show drew 1.6 million viewers during the second episode. But viewership remains modest, and Oprah will only appear a few times a week.
Discovery's investment in the channel has been substantial, but as a public company, it can't indefinitely support a venture that has little hope of becoming profitable. As The New York Post recently wrote: "Discovery needs OWN to be successful, as it has spent more than $200 million to fund the channel and has sold major marketers such as Procter & Gamble on multiyear ad deals." Forbes wrote at the end of last year that "Some close OWN watchers warn that advertisers' support has just about reached its limit."
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