Tyr-Ziu Saxnot
07-13-2015, 08:42 PM
http://www.investopedia.com/articles/markets/071315/why-colt-went-out-business.asp?partner=YahooSA
Why Colt Went Out of Business
By Rakesh Sharma | July 13, 2015
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. It's diverse assortment of guns and
firearms have fueled American adventures in the West and abroad. They were also the
preferred weapons of choice for local law enforcement agencies and gun enthusiasts.
That is why it made news when the iconic gun manufacturer filed for bankruptcy in June of
this year. In its bankruptcy filing, the company said it was unable to pay $500 million that
it owed to dozens of creditors. Recently, it defaulted on payment worth $10.9 million to holders
of senior bonds. It's long term bonds have received a "Junk" classification from ratings agency
S&P. In addition, Colt's plans to restructure its senior bonds at a 55% discount have been
roundly rejected by investors.
So, what went wrong at an iconic company that made guns used to "win the West"? Tne answer
to that question is a complicated one and involves a mix of bad management, product portfolio
and imprudent financial engineering.
Missing The Mark On Products And Markets
To be sure, 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, such as 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 new customers in disenchanted males fearful of America's economic decline. 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 intervening 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.
The company also lost key profitable markets. For starters, law enforcement agencies exchanged
their Colt weaponry for Glock's machines. The Austrian weapon 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. (SWHC) also stole a march over Colt by introducing 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.
But, the company's move to court new customers ended in disaster.
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
provided further ammunition to gun control advocates. These developments have 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 (or, the number of repeat
purchases) has increased, thanks to the Obama administration's attempts to introduce gun control
legislation. (For more, see: How does gun control policy affect the stock price of firearm companies?)
Colt's competitors Smith & Wesson and Sturm, Ruger & Company Inc. (RGR) reported record profits
and sales in 2012 and 2013.
I was just looking at a new Colt I wanted last week at Guns and Ammo in Memphis. The price was 979.95 and a bit steep for me to drop right now. -Tyr
Why Colt Went Out of Business
By Rakesh Sharma | July 13, 2015
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. It's diverse assortment of guns and
firearms have fueled American adventures in the West and abroad. They were also the
preferred weapons of choice for local law enforcement agencies and gun enthusiasts.
That is why it made news when the iconic gun manufacturer filed for bankruptcy in June of
this year. In its bankruptcy filing, the company said it was unable to pay $500 million that
it owed to dozens of creditors. Recently, it defaulted on payment worth $10.9 million to holders
of senior bonds. It's long term bonds have received a "Junk" classification from ratings agency
S&P. In addition, Colt's plans to restructure its senior bonds at a 55% discount have been
roundly rejected by investors.
So, what went wrong at an iconic company that made guns used to "win the West"? Tne answer
to that question is a complicated one and involves a mix of bad management, product portfolio
and imprudent financial engineering.
Missing The Mark On Products And Markets
To be sure, 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, such as 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 new customers in disenchanted males fearful of America's economic decline. 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 intervening 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.
The company also lost key profitable markets. For starters, law enforcement agencies exchanged
their Colt weaponry for Glock's machines. The Austrian weapon 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. (SWHC) also stole a march over Colt by introducing 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.
But, the company's move to court new customers ended in disaster.
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
provided further ammunition to gun control advocates. These developments have 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 (or, the number of repeat
purchases) has increased, thanks to the Obama administration's attempts to introduce gun control
legislation. (For more, see: How does gun control policy affect the stock price of firearm companies?)
Colt's competitors Smith & Wesson and Sturm, Ruger & Company Inc. (RGR) reported record profits
and sales in 2012 and 2013.
I was just looking at a new Colt I wanted last week at Guns and Ammo in Memphis. The price was 979.95 and a bit steep for me to drop right now. -Tyr