Very few gun manufacturers have the kind of history that Colt has. The Connecticut-based company is a pioneer of sorts in the gun industry. Its diverse assortment of guns and firearms has fueled American conquests in the West and abroad. They were also the preferred weapons of choice for local law enforcement agencies and gun enthusiasts for many years.
That is why it made news when the iconic gun manufacturer filed for bankruptcy in June 2015. In its bankruptcy filing, the company said it was unable to pay the hundreds of millions it owed to dozens of creditors. Colt missed a payment of $10.9 million to holders of senior bonds only one month earlier. The company sought bankruptcy protection to meet all of its obligations to customers, vendors, suppliers and employees while it restructured its balance sheet.
So, what went wrong at an iconic company that made guns used to "win the West"? The answer to that question is a complicated one and involves a mix of bad management, product portfolio, and imprudent financial engineering.
Colt's Business Through the Years
Colt is no stranger to bankruptcy proceedings. In fact, the company's first bankruptcy was in 1842, just six years after it was started. Subsequently, the company's eponymous founder Samuel Colt went back to the drawing board and designed a range of new products, including the iconic Colt .45, for the company. The new products powered American expansion and — at one point in time — Colt was one of the 10 richest businessmen in the United States.
Regular wars and political crises fed into the company's profits. For example, the company's sales surged during the Vietnam War in the 1960s. As the war ended, the firearm industry courted disenchanted males fearful of America's economic decline as new customers. The United States' military adventures in the Middle East during the early 1990s and the last decade resulted in similar profitable infusions to the company's bottom line.
In the period between the two wars, however, Colt's fortunes dipped as design patents for its firearms expired. The company's products, which set the standard for the rest of the industry, became also-rans as a flood of discounted competitors hit the market in the 1980s.
Losing Market Share
The company also lost key profitable markets. For starters, law enforcement agencies exchanged their Colt weaponry for Glock's guns. The Austrian weapons manufacturer began by making firearms that were cheaper and lighter than Colt's products. Moreover, they held more ammunition. Glock was not the only one: Smith & Wesson Holding Corp. (now known as American Outdoor Brands Corp.) also introduced similar guns. Both companies reaped the benefits of this innovative approach during America's war on cocaine in the 1980s, when police officers relied more on their weapons in the fight with armed criminals.
Simultaneously, the company lost vital defense contracts to foreign players. For example, the company's iconic M1911 reigned as the primary sidearm of the U.S. military for 90 years before being replaced in 1985 by Beretta M9, made by the Italian arms manufacturer. Similarly, in 1988, the army replaced Colt with FN Manufacturing, a subsidiary of Belgium-based FN Herstal, as its primary provider of M16 rifles. These were originally designed by Colt and used extensively during the Vietnam war.
As a result of losing market share across the board, Colt filed for bankruptcy in 1992. Industry experts cited excessive debt, reduced civilian demand, and loss of government contracts as primary reasons for the company's problems. The government exacerbated those problems. The Clinton administration tightened the screws on the personal firearms and ammunition industry by introducing strict gun control measures. A wave of litigation and lawsuits followed, resulting in increased spending by gun lobbyists in Washington.
Iraqi-American financier Donald Zilkha, who bought Colt in 1994, attempted to steer the company away from consumers to military contracts and new markets. Colt was trying "to be a different animal," he said in an interview to The New York Times at that time.
However, the company's move to court new customers ended in disaster.
Smart Guns Proved Not-So Smart
The introduction of smart gun technology, which was designed to make guns safer, alienated Colt's core customer base of gun advocates who misconstrued the move as one that provided further ammunition to gun control advocates. These developments occurred despite prevailing market trends that were favorable to the industry. Thus, even though the number of gun owners has declined in recent years, the number of guns per person has increased.
But Colt has struggled to overcome its mistakes. The company is attempting to revive its business in the consumer market as part of its post-reorganization strategy, but has not quite made up for those losses in the government contracts market.
Financial Engineering Gone Wrong
The company's product woes are just one part of the equation, however. The reshuffling of business and executive priorities over the years further complicated Colt's already-precarious financial position. Private equity firm Sciens Capital Management took control of the gun manufacturer in 2005 after Zilkha lost interest in the business. The transfer resulted in a $300 million debt for the company.
Most private equity firms attempt to wring their maximum possible profits from their investments. Sciens was no different. Immediately after the transfer, the firm created a separate arm for Colt's defense operations and let its consumer division languish. Even as the company lost money over the next couple of years, the firm awarded generous bonuses and consulting remuneration to its officers.
According to one estimate, at least $131 million of the total debt incurred by Colt during its recapitalization in 2004 was used to "make distributions to Sciens in 2007." Sciens also attempted to take the company public in 2005 but had to abandon plans after investors remained unconvinced about the gun maker's ability to turn a profit. Colt went on a borrowing spree shortly after. The company borrowed an additional $250 million from the bond market in 2009 before its most recent bankruptcy filing.
The Bottom Line
When Colt officially exited bankruptcy on Jan. 13, 2016, the company claimed it had reduced its debt load by $200 million and had more cash on hand to maintain operations. However, the business continues to battle to reclaim market share in the commercial firearms business, as well as prove its financial stability and strength moving forward.