How to Tell a Company Is About to Die
When a company revolutionizes a market niche -- creates it, even -- it's not long before the stock market calls with "come hither, IPO" flirtation. And so it was with a little money engine that could: Groupon (GRPN), the daily deals website based in Chicago and co-founded by an ambitious young twentysomething named Andrew Mason.
But Wall Street, fickle mistress she is, can certainly change her ways from one year to the next. After going public on the Nasdaq amidst fanfare in November 2011, Groupon's price sank lower than one of its can't-miss specials: from $26 per share to $2.76 just 12 months later. It's never quite recovered since and now trades at less than $4.
Today, Mason is out as CEO -- or rather was forced out in 2013. Groupon posted a loss of nearly 30 percent in 2014. And the company that turned down a reported $6 billion acquisition bid from Google (GOOG, GOOGL) in 2010 now limps along in a crowded daily deals field, with a market capitalization of one third that spurned offer.
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Makes you think: Would anyone even buy a Groupon for Groupon shares? "The stock is clearly out of favor," says Katie Stockton, chief technical strategist for BTIG in New York.
Groupon could always surprise investors, as it did between February and March, when it temporarily doubled in value following a rosy earnings report for the last quarter of 2015. But that was oh so temporary; it's now off 32 percent over the last 12 months.
Time for some spin. And that posits the question: Is this what a dying company looks like?
Just as there are 50 ways to leave your lover or 101 uses for a dead cat, a company can betray its swan song any number of ways. One big clue comes via the spin businesses put on a repeat run of sour earnings reports. "Almost every quarterly earnings announcement trumpets some sort of transformation program -- rarely with follow up," says Greg Portell, partner at A.T. Kearney and based in the St. Louis area.
"Analysis of the profit-and-loss statements should be able to trace specific savings programs to their impact on the bottom line," Portell says. Too much repeated cost cutting and insufficient revenue, for example, point to something potentially ominous.
Leading to the end. But ominous is sometimes nothing compared to infamous. A harsh, unlikable leader can pull down a company in the financial sphere and the media.
Though beloved as a maker of reliable kitchen appliances, Sunbeam became a death star under the leadership of Al Dunlap. The chief executive enjoyed his nickname Chainsaw Al, earned for his propensity to fire workers.
Sunbeam's spike in stock price during the late 1990s hid rigged numbers under Dunlap's regime. Behind the share price gains sat inventories bursting with unsold goods. Incoming cash? Not enough to fill a Mixmaster bowl.
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"Sunbeam was the triumvirate of bad news for investors: mismanagement, accounting games and outright fraud," says Bob Johnson, president and CEO of the American College of Financial Services in the greater Philadelphia area.
Dunlap was fired in 1998 and an SEC investigation determined that in 1997, "at least $60 million of Sunbeam's reported $189 million in earnings from continuing operations before interest and taxes came from accounting fraud."
Sunbeam called it quits in 2001, casting its shareholders adrift, "and in 2009, Conde Nast Portfolio named Dunlap the sixth-worst CEO of all time," Johnson says. "It's hard to imagine that their are six worse CEOs."
A lesson in consequences. Yet if there's not an insidious leader at the top of a failing concern, many other times companies with the best intentions either make boneheaded moves or fail to make the right ones and suffer the consequences.
If Groupon's kiss of death started with spurning Google, then the second scenario applied to a photography company that lost its focus in a market undergoing radical disruption.
Such was the case with Eastman Kodak Co. (KODK), a venerable company that dates to 1888 but crashed into Chapter 11 bankruptcy in 2012. The reason: Kodak somehow botched the transition to digital photography, even though it pioneered the first digital camera in the mid-1970s. If you bought Kodak around then (in 1973) the price was about $30 a share, and peaked at more than $90 in 1997.
"In 1996 Kodak was huge," says Gordon Tredgold, a leadership and management expert based in Palm Beach County, Florida. "They employed 140,000 workers and were ranked the fourth-most valuable brand in the United States, behind Disney (DIS), Coca-Cola (KO) and McDonald's (MCD)."
And remarkably, Kodak became the No. 1 seller of digital cameras in the U.S. by 2005. But left behind in an era of smartphones and selfie sticks, Kodak began a sky dive into the toilet that yielded worthless shares by the bankruptcy.
Still if there's such a thing as a second act for a first class trademark, Kodak might be on its way. In the end, its legacy moniker may save it, as Kodak remains a familiar brand to many consumers oblivious to the financial intrigue.
Though down to $8.75 a share in February, the stock has nearly doubled since to $17. Granted, that's in turn less than half its 2014 peak of $37.20. But the recent rebound has some optimistic, as the company in May revised revenue guidance for 2016 from $1.5 billon to $1.7 billion.
Meanwhile, even digital disruption doesn't mean immunity from destruction.
"Consider Fitbit (FIT) and every other company that believes data alone is valuable," says Wes Higbee, president of Full City Tech Co. in New York. Yes, the company has a huge lead in the wearable fitness device market. "But just look at Fitbit's stock performance over the last year since its IPO." After peaking at $47.70 in July 2015, "now it's under $14."
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At least for the sake of FIT shareholders, under $14 and six feet under are two very, very different landing spots. But keep an eye out: The fading pulse of a troubled company is something not even a Fitbit can track.
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