Empty Pockets

Interesting Bankruptcy Cases

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Empty Pockets

Two examples of bankruptcy filings help remind investors how easy it is to pick the wrong stock. The first example is Bethlehem Steel. Bethlehem Steel was founded by legendary steel tycoon Charles Schwab in 1904 in Bethlehem, Pennsylvania. The company produced some of the nation’s first steel railroad rails, revolutionized high-rise building construction with the introduction of structural I-beams in 1908, and built the country’s first aircraft carrier in 1925. Landmarks such as the Golden Gate Bridge, the Chicago Merchandise Mart, Rockefeller Center and the U.S. Supreme Court were constructed with Bethlehem steel. Peacetime employment reached a peak of 157,000 workers in 1957, and profits hit a record $426 million in 1988. In 2001 the mammoth steel company filed for Chapter 11 bankruptcy.

Bethlehem was one of the stocks in the Dow Jones Industrial Average for nearly 70 years until it was replaced by Johnson & Johnson in 1997. Its stock price reached a peak of nearly $60 in late 1959 and remained in a broad trading range over the next 40 years, as the firm struggled to improve its competitive position through various acquisitions, divestitures, and cost cuts.

Indeed, only three members of the original 30-stock Dow Average established in October 1928 are still included in 2005: General Electric, General Motors, and Standard Oil of New Jersey, now ExxonMobil.

Another example is Polaroid Corp., which was founded in 1937 by 28-year old Harvard dropout Edwin Land. Land was a brilliant physicist and tireless inventor who accumulated 535 patents by the time of his death in 1991 (second only to Thomas Edison). An early quest to solve the problem of headlight glare led to a patented process for polarized glass, and a variety of optical products for military and commercial use. The self-developing Polaroid Land camera he ultimately developed was a marketing sensation when introduced for $89.50 in 1948. A steady stream of improvements including instant color film stoked consumer interest in the 1950s and 1960s.

Polaroid shares were a favorite among aggressive investors, soaring more than 40-fold from their initial public offering in 1957 to an all-time high of $149.50 in 1972 ($74.75 adjusted for a subsequent two-for-one split). The SX-70 camera, which ejected prints that developed externally, was introduced the same year. In addition, there was talk of a forthcoming instant movie system.

What’s more, in 1991, a successful patent infringement lawsuit against Eastman Kodak appeared to vanquish the sole competitive threat in instant photography. But Polaroid was unable to capitalize on the $925 million judgment, and struggled to broaden its product line amidst the proliferation of inexpensive 35mm cameras, one-hour photo kiosks and digital photography. Eventually Polaroid filed for bankruptcy in 2001.

The moral of these stories is that success today does not ensure survival tomorrow; therefore, investors need to diversify so that these kinds of events will not destroy their portfolio.