The Fall From Glory: Delisting Brands

By Greg McFarlane | February 06, 2012 AAA

On January 19, the public officially became privy to one of the least climactic announcements in recent Wall Street history: 123-year-old Eastman Kodak, a company founded during the (first) Cleveland administration, back when there were only 38 states, filed for bankruptcy.

Eastman Kodak wasn't merely a large company with a presence on the world's most prestigious stock exchange. It was among the elite of the elite, an archetypal blue chip: a component of the Dow Jones Industrial Average for 74 years, until being replaced in 2004. Since the late 90s, Eastman Kodak stock had been (and continues to be) positively Freddie Mac-esque in its decline, maxing out at $92.87 in 1997 and falling to 32 cents (and sinking) today. Apparently, holding out for a film camera resurgence is not a prudent way to do business.

How can this happen to a renowned titan of American commerce? Examining Eastman Kodak and other corporations that suffered similar fates, the same underlying reason comes up repeatedly - a steadfast failure to adapt.

SEE: The Dirt On Delisted Stocks

Jackson Hewitt
In theory, iconic brands that get delisted can reemerge leaner and more virile as private companies, though it's often not the case. In May of 2011, tax-prep giant Jackson Hewitt filed for bankruptcy following its delisting from the NYSE. Prior to the end of August 2011, the stock traded - when it did trade - on the Pink Sheets for barely a penny, before being snuffed out. Since then, Jackson Hewitt has managed to recover successfully in some areas, such as pulling itself out of bankruptcy in August, after undergoing a Chapter 11 debt-restructuring plan. Tax preparation should be the ultimate recession-proof industry; regardless of the underlying economy, everyone has to file a return. Jackson Hewitt may still be the second biggest preparer in the industry, but it's a declining industry, due to the popularity of tax preparation software.

Among the reasons for its downturn, Jackson Hewitt embraced refund anticipation loans. To summarize how they work, you'd let a Jackson Hewitt preparer handle your refund at your friendly neighborhood Walmart kiosk. The preparer would give you the equivalent of your expected refund then and there, minus a cut, saving you the trouble of waiting a couple of weeks for the United States Treasury to mail you a check. That's a horrible deal for the taxpayer, with interest levied at an enormous rate, so high that the government cracked down on the practice. Jackson Hewitt's strategy wasn't unethical - customers knew, or should have known, what they were getting into - but it did suggest that the company was more interested in amassing questionable short-term profits, than in building something respectable for the long run.

Great Atlantic & Pacific Tea Company
Another venerable but recently delisted company of Kodak's vintage was The Great Atlantic & Pacific Tea Company, better known as A&P. The grocery chain fell from prominence thanks to multiple contributing factors over the decades: overexpansion, too much leverage, and obliviousness to energetic upstarts such as Walmart.

After dwindling from 16,000 stores to a mere 338, A&P filed for bankruptcy in late 2010. Debt had exceeded assets, and during that year alone, the company's stock price tumbled 92%. A&P does continue to sell groceries, much in the same way that Portugal maintains a navy several centuries after ceding its position as the world's dominant sea power.

Blockbuster
Even companies whose very business model depends on new technology are in danger of delisting. Blockbuster was founded in 1985, tasked with getting people out of the theater and revolutionizing the way they watch movies. For a while, it worked. However, as VHS tapes became obsolete and competitors like Netflix saved customers from the trouble of even having to leave home to find entertainment, Blockbuster began heading for bankruptcy.

Too many stores, and too much money borrowed to open them, resulted in a bankruptcy warning in early 2010. By that summer, the company attempted to stay on the NYSE by artificially raising its stock price via a reverse split. Shareholders said no, and the company existed in limbo for a few months before becoming a fully-owned subsidiary of Dish Network in 2011. At the very least, that saved Blockbuster the ignominy of standing alone as a once-proud retail giant. From 4000 stores at its apex, Blockbuster currently operates merely a few hundred.

The Spin Machine
Without exception, every once-monumental company that's now in decline attempts to put a positive spin on the situation while straining credulity. Take these examples: Chapter 11 "positions (A&P) for a bright future with solid financial backing from sophisticated investors." Or, Kodak "will emerge a lean, world-class, digital imaging and materials science company."

Circuit City's stock fell 99% in 2008 and it went out of business shortly thereafter (the name remains, sold to an online retailer), but it "review(ed) its operations while exploring strategic alternatives, (and had) been working with advisers to determine how to substantially improve its operating and financial performance."

Whether the individuals who devise these blindly hopeful statements actually believe their own words is irrelevant to consumers and investors. It's also understandable, as no one wants to be at the helm of a ship as it capsizes.

The Bottom Line
As an investor, just remember that companies dismissive of change are practically begging to lose shareholder value and be delisted. The dynamic companies that adapt to the market - be it Silicon Valley upstarts or centuries-old brewers and distillers - have to stay perpetually vigilant to avoid similar fates.

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