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Not Too Big To Fail: 5 Blue Chip Companies That Have Fallen From Grace

5 companies that are good reminders for us that blue chip companies are not infallible.

 

Investors often assume that blue chip firms are the safest bet for their hard earned money. After all, these are supposed to be high-quality stocks. But as the following 5 firms have demonstrated in recent history, that may not always be true.

At their peak, each of these 5 companies were the darlings or stalwarts of their industries. Highly valued and recommended by analysts, it seemed like they could never fall.

1. Swiber

Hong Kong-based offshore services firm Swiber Holdings is the latest to join the club of blue chip companies who have fallen.

In less than 10 years since its inception, the vessel chartering firm has grown to a publicly-listed local favourite in the offshore oil and gas sector, providing engineering, procurement, installation and construction support services. At its peak in 2007, it had a market capitalisation of over S$1.5 billion and traded at a peak of S$0.88 in 2014.

But in a move that shocked the market and investors alike, the firm announced its plans for liquidation this past July, before quickly changing its mind and deciding to be placed under judicial management instead. Precipitating these events were demands for payments amounting to nearly US$26 million, cancellations and delays in projects, high leverage, as well as the firm’s failure to raise US$200 million from a preference share sale agreement. Trading of its stock has also been suspended.

As discussed in further detail here, the SME success story has been financially strained since 2011. Add that to the mix a rough outlook for the oil and gas sector in the past year and a half, its announcements do not seem too shocking.

In the wake of Swiber’s implosion, investors of both its stocks and High Yield bonds have been left high and dry, with the beleaguered firm caught in a severe liquidity crisis and unable to make payments.

2. Noble Group

Once valued at more than US$14 billion, the Hong Kong-based agricultural and energy product supply chain company has seen a spectacular fall from the top.

With humble beginnings in metals trading, the Group has since diversified its portfolio to include global energy supply chain services and agricultural products. A market leader in liquefied natural gas and one of the pioneers in ethanol and carbon credits, the firm was once lauded for its vision, with its founder and chairman, Richard Elman nominated as an Ernst & Young Industry & Commerce Winner in 2006.

But what turned out to have been a house of cards came crashing down in February 2015, when a report exposing the Group’s financial manipulation and accounting irregularities was published. Likened to Enron, findings showed that Noble had been reporting lower levels of debt and higher profits.

The Group did not take long to crumble after that. Its share price plummeted as spooked investors offloaded their stocks. The Group then reported its first annual loss in 2 decades, including a US$1.9 billion write down due to substantial impairment losses and losses from its associates and joint ventures, prompting a series of downgrades by the 3 ratings agencies who cited heightened risk.

The Group was de-listed from the Straits Times Index in March 2016. While no new allegations have surfaced, it is by no means out of stormy waters. Founder Richard Elman has announced his intention to step down by June 2017, while other key personnel have already abandoned ship, including CEO Yusuf Alizera and the respective heads of gas & carbon trading and continental power trading. It has also taken to selling off once-core businesses, such as its energy solutions arm and agricultural unit.

In search of a new strategic investor at the moment, the direction and path of Noble Group seems unclear.

3. Nokia

Nokia, once such a household name that only the model number mattered, could arguably be the saddest story on this list.

While not the first company to release a mobile phone, it certainly was the first to make it appealing to the masses. 129 years old when it achieved worldwide fame in 1994 for its 2100 series, which surpassed projections and sold 20 million sets, the Finnish brand quickly became a market leader in the burgeoning mobile phone market. In 2007, it reported an operating profit of €7.08 billion and by the end of the year had reached a market valuation of €151 billion. Alas, they had reached their peak, and would soon begin their fall.

Nokia’s descent started with the launch of Apple’s iPhone in 2007 and the take-off of Google’s Android shortly after. It failed to recognise the revolution that smartphones would bring to the industry and was thus too late in adopting the necessary technology. By the time Nokia executives realised their mistake, they were already too far behind new entrants Apple and Samsung.

The firm also suffered from crippling inadequacies at the management level and a lack of software development experience. Its first smartphones, the 5800 and N97, developed hastily and released more than a year after the first iPhone, were plagued with technical and software problems.

In the final stages of its downfall, Nokia’s mobile phone business was acquired by Microsoft, a partnership borne out of necessity which the latter will go on to regret. This merger produced the Lumia range of smartphones with a Windows operating system. Decent at best, Windows phones were never going to be any serious competition to Apple and Samsung; by 2013, its share in the smartphone market was a mere 3%. 2 years later, Microsoft would be forced to write off US$7.6 billion for the acquisition.

Unlike the other firms on this list, Nokia’s eventual demise was not brought on by poor financial management or accounting scandals. Rather, hubris and failure to adapt to the constantly and rapidly transforming mobile phone market were what guaranteed its downfall.

4. Lehman Brothers

A little more than 8 years ago, Lehman Brothers, then the 4th largest investment bank, with nearly US$640 billion in assets, filed for the largest bankruptcy in U.S. history.

The crux of Lehman Brothers’ demise was the U.S. housing bubble brewing in 2003 and 2004. Wanting to earn higher returns for their money, financial institutions such as Lehman Brothers acquired subprime mortgages which offered much higher returns, due to the substantial risks these mortgages carried.

These subprime mortgages were then packaged into products known as collaterised debt obligations (CDOs), which were drastically overvalued before being sold to unwitting investors. As a result, Lehman Brothers and many like it made record-high profits. At its peak in 2007, it had a market capitalisation of US$60 billion, with its stock trading at US$86.18.

However, it was only a matter of time before the subprime mortgage default rate began to rise, and it did in the first quarter of 2007, leading to the inevitable bursting of the housing bubble. By 2008, Lehman Brothers was in a rapid downward spiral. It reported huge losses from its exposure to mortgage-backed securities and had cut 6% of its workforce. After deals to be rescued by the Korea Development Bank and Barclays fell through, and the refusal of the U.S. government to provide aid, the 158-year old investment bank closed its doors.

Unfortunately, Singapore did not escape unscathed. Nearly 10,000 Singaporean retail investors, many of whom were elderly and not financially savvy, lost all or a substantial portion of their investments amounting to S$500 million in Lehman-linked products. This prompted other financial institutions such as Maybank and Hong Leong Finance to step in to help the less fortunate, and sparked debate and criticism over the government’s credibility in encouraging investment.

5. Deutsche Bank

We could be seeing another global financial crisis all over again, this time starting in Germany.

Deutsche Bank, the largest lender in the Western European nation has been dubbed the world’s riskiest bank by the International Monetary Fund.  Besides failing U.S. Federal Reserve stress tests 2 years in a row, the German bank currently has more than €40 trillion in exposure to derivatives, about 3 times the size of the European Union GDP, as well as a leverage ratio of over 40 times.

Founded as a means to facilitate trade between Germany and the rest of the world, Deutsche Bank was instrumental in Germany’s rise in economic power, thereby enabling it to become the powerhouse it is today. By 2000, Deutsche had become one of the world’s 10 largest banks, and made its debut in 2001 on the New York Stock Exchange; some 6 years later, it traded at its peak of US$159.

Since then, it has been plagued by woe and scandals. It may have survived the 2008 financial crisis, but not without taking a hit to its investment banking arm which resulted in a loss in net profit of €4 billion. In 2012, it was revealed that the bank had kept €12 billion in losses from derivatives under wraps.

Then, in a sign that it may be close to bankruptcy, it announced in 2013 that more capital was needed, but managed to raise a total of €12.5 billion. 2015 saw it slapped with a US$2.5 billion fine for rigging LIBOR rates and US$275 million in penalties for violating U.S. sanctions. The discovery of Russian mirror trades carried out with possible links to sanctioned Russian individuals only further sullied its reputation.

This year, it announced a record loss of €6.8 billion for 2015, and then delighted short-sellers when its stock price took a tumble upon the news of Brexit. It has since dropped again to a new low after the German government ruled out state aid. And to top it all off, investigations by the U.S. Department of Justice into its mortgage-backed securities business will likely culminate in billions of dollars in fines.

Likened to Lehman Brothers, the Bank is desperate need of capital. Plans for a major overhaul include selling off assets, such as its private-client services unit, doing away with dividends, as well as cutting 35,000 jobs by 2020. But given unforgiving market conditions, an asset sell-off may not provide immediate or sufficient reprieve. Their top priority now is to get their capital up to regulatory standards, but if that had been a challenging feat before, it would be next to impossible at this point.

Conclusion

With the exception of Nokia, these firms all shared a common denominator of gross and wilful financial mismanagement. And while Deutsche Bank has not yet collapsed, it may be on its last legs. They may have once been the stars of their respective sectors, but as history will continue to remind us, it is almost always never what it seems underneath the shining facade.

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