The two ways to go bankrupt, as Ernest Hemmingway famously wrote, are gradually and then suddenly. The “gradually” phase of the process can take a good long while, sometimes years, but once a business starts to exhibit the two biggest symptoms of impending disaster–falling revenues and mounting debt–the “suddenly” part is all but inevitable. It came for the troubled biotech company Dendreon (ticker: DNDN) on Monday when it filed for Chapter 11 bankruptcy.
The move should have surprised exactly no one, and not just because I predicted it well over a year ago now on Seeking Alpha. Back in September, the company’s own management warned that it was probably going to wipe out its shareholders. But that didn’t stop credulous investors from buying Dendreon’s stock–incredibly, it didn’t dip below a dollar until earlier this month–or dubious stock boosters from feeding their hopes for a miraculous turnaround. Take a look at the headline on a Zack’s.com posting: “Why Earnings Season Could be Great for Dendreon.” The article, which gives DNDN a buy rating, is dated November 10, 2014–the exact same day the company announced that it had filed for bankruptcy.
Last week, I posted an article on Seeking Alpha on the troubled biotech firm Dendreon (DNDN). Eighteen months ago, I shorted over 200,000 shares of the company. As I said in the article, even though the stock has lost its half its value, I haven’t covered a single share, and I doubt I ever will. Why? Because it’s a classic example of what I call a dead-company-walking. In the near future, probably less than two years, I believe it is destined for one fatal outcome: bankruptcy.
This prediction, and the fact that I have sold the stock short, generated a fair amount of negative reactions to the piece. One commenter declared that all short sellers should be “iviscerated” (sic). Yikes! Others respondents were less colorful, but no less angry. They blamed short sellers like me for bringing down what they believe is a good company with a beneficial cancer drug. But blaming shorts like me for Dendreon’s demise shows a fundamental misunderstanding of corporate capital structures and how bankruptcy works.
The talk of the investment world this past week has been the continuing soap opera at JC Penney. The latest installment has been the feud between board member and New York hedge fund manager Bill Ackman and just about everybody else within the company. Ackman, of course, was the one who convinced the board to hire former Apple retail guru Ron Johnson as CEO—a move that cost the company billions after Johnson disastrously tried to make the venerable retailer into some kind of glorified cross between Saks Fifth Avenue and Urban Outfitters.
After the company finally got rid of Johnson in May, Ackman agreed to bring back former CEO Mike Ullman on an interim basis. But that brief period of harmony vanished this week when Ackman publicly aired his displeasure with Ullman’s leadership. That move was the last straw for the board. They accepted Ackman’s resignation, calling his recent behavior “disruptive and counterproductive.”
Too which I say—”disruptive and counterproductive???” I know corporate boards tend to err on the side of decorum and blandness, but calling Bill Ackman “disruptive and counterproductive” to Penney’s is like calling an arsonist “disruptive and counterproductive” to buildings.
I shorted Penney’s seven months ago. It was a dead company walking then and I still believe it is a dead company walking today. And the person that mortally wounded it was the exact person who caused the latest trouble, Mr. Ackman himself. Ackman has been “disruptive and counterproductive” from day one at Penney’s, and even though he’s gone now, he’s left behind the torched shell of a once great company.