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Bankruptcy’s Impact on Brand Perception

Largest Bankruptcies

20 largest bankruptcies of 2012 (Source: Good.is)

San Bernadino this week became the third California city in the last month to seek bankruptcy protection because it could not close a $45.8M budget gap.  Similarly, Stockton and the small resort town of Mammoth Lakes both sought financial protection due to large budget deficits.
 
Lack of funds is the primary reason for the filings.  Basically, these municipalities are spending
more money than they actually earn from taxes, fees and other revenue.
 
According to the Administrative Office of the U.S. Courts, bankruptcies in the U.S. have more than doubled from 2007 to 2011, topping its highest point ever at 1,571,183 filings for the year ending March 31, 2011, although 2012 saw a 13 percent drop over last year.
 
The soured economy certainly impacted the rise in bankruptcies.  While the ability to secure credit may be hampered, and for cities like San Bernardino, bond ratings may be downgraded, the question remains: Does bankruptcy have the same negative brand impact it did a decade ago even in today’s soured economy?
 
Take General Motors for example. The company filed for bankruptcy protection on June 1, 2009, the fourth largest in the nation’s history.  The brand initially took a big hit in the media and financial markets.
 
GM however quickly emerged from bankruptcy only 40 days later with the help of the U.S. Treasury and recently announced June 2012 sales of 248,750 vehicles in the U.S. alone, the company’s highest since September 2008.
 
General Motors today is a company with a new, reinvigorated brand identity.  Yes, new vehicles, increased revenues and good earnings help.  It’s sometimes hard to remember that only a couple of years ago the company was on the brink of financial disaster.
 
The key to success is effectively managing communications during the bankruptcy process.  At the time of the Detroit automaker’s bankruptcy filing, GM’s CEO Fritz Henderson promised that the fallen corporate giant will be reformed and that “business as usual is over.”
 
The strategy seemed to work. Making sure all audiences are informed of a company’s reorganization plan is essential for success. Bankruptcy is not permanent, but a tool to help protect companies and individuals from creditors while a restructuring is put into action.
 
So, the answer might be that bankruptcy does not have the same negative connotation it once had given today’s uncertain marketplace.  Done right, the results can be positive and even generate new investment opportunities.  Done wrong, the repercussions can be disastrous.
 
All eyes now are on Scranton, Pennsylvania.  The cash-strapped city last week cut the pay of its municipal workers to $7.25 an hour and might be the next local government to declare bankruptcy.

 

George Medici, gmedici@pondel.com
 
 

Resisting Temptation to “Like This”

No hoods

No Hoodies (source)

As I mulled this post while prying my seven-year-old out of bed this morning, I also wrestled with all of the brouhaha surrounding the pending Facebook IPO.  Something just did not sit right.  Then it hit me.  I have seen this show before.
 
Facebook’s global adulation is understandable, and well earned.  One in eight people on the
planet use it.  That’s an unfathomable audience that is now interconnected. But as the reports during the IPO process reach their crescendo, two large questions loom:  1) Does Facebook’s advertising really work; and 2) Should the company be valued at $100 billion?
 
Don’t get me wrong, I want to see the company succeed, badly.  I am dying for some good news.  But the more our collective anticipation builds, the more I worry.  Is there a clear rationale for this target valuation or is it hubris?  Are we more enamored of simply breaking an IPO record, or are investors using sane judgment?  And should California really be thinking it can potentially narrow its budget deficit with increased taxes from the many new resident millionaires that will materialize from this transaction?  I get the feeling we are putting too much value on this event, and we might be in for some disappointment.
 
As my son and I had our breakfast, an opinion piece in today’s Wall Street Journal titled “Jenkins:
The Zuckerberg Challenge
” sustained my anxiety.  The author too postulated that apart from enviable 2011 ad sale revenues totaling $3.2 billion, a chasm exists between this and Facebook’s estimated target valuation.  He also provides heaps of praise for the seemingly endless possibilities that lay before the company, which I can’t deny.
 
But as a newly public company, Facebook’s iconic leader Mark Zuckerberg will need to be more transparent with the company’s operations and growth strategies than ever before.  Demonstrating that its ad engine provides real value to its customers and a putting a keen focus on generating profits will be paramount. He now has to answer to many more people that own his baby, and should the stock price fall below the IPO level, the barbarians surely will arrive at the gate.  Which makes me wonder why the company is aiming for such an immediate high valuation in the first place.  “Under promise and over deliver” has been a mantra that has served many CEOs well.
 
As I make my final inspection of my son’s school clothes it also occurs to me that Mr. Zuckerberg might want to leave his signature hoodie at home and don a suit now and then. Growing up is hard, but if you want a $100 billion valuation, you need to play the part.

 

– PondelWilkinson, investor@pondel.com
 
 

Taking Stock of Intonation

Hey friends of PondelWilkinson, let’s keep this one to ourselves: Voice analysis may become the next tool, and a good one, for predicting stock prices. Two professors from Duke think they have proved it.
 
They learned that if you listen very carefully to subtle emotional cues in a CEO’s or CFO’s voice on a conference call, you may be able to forecast, not an EPS estimate, but a company’s future stock performance.
 
Using a digital voice emotion software program made by privately held Israeli company Nemesysco Ltd., Profs William Mayew and Mohan Venkatachalam (yes, I checked the spelling twice) analyzed voice inflections from 1,647 typical quarterly conference calls hosted by 671 public companies.
 
The study monitored subtle and not so subtle vocal cues that showed either positive or negative emotional states.  They then checked the companies’ performances to learn whether earnings, stock prices or analysts’ recommendations corresponded with the cues over the next six months.
 
Voila!  When the execs were excited, the stocks responded favorably and earnings were on the rise. But the more negative the intonations, the lower the stock prices went. According to the study, which was published in the Journal of Finance, performance was most pronounced in either direction when there were questions posed on calls, making it easier for the software program to detect the cues.
 
Where can you buy the software package and how much does it cost? Sorry, you’ll have to research that for yourself.  If it’s not too expensive, please let me know.
 
I guess we just have to hope that the executives on those conference calls really are feeling what they are saying, lest we must heed the words of American poet William Carlos Williams, who wrote: “It’s not what you say that matters, but the manner in which you say it.”

 

Roger Pondel, rpondel@pondel.com