Wednesday, August 13, 2008

That's why we need business cycles

Two unrelated stories caught my attention. One from the German newspaper Handelsblatt the other from the Austrian newspaper Witschaftsblatt. Both deal with rather small companies that are either in or close to bankruptcy.

Modell-train manufacturer Maerklin after firing its CEO is now suing international fiancial advisory firm Alix for reimbursement of millions in advisory fees. Around 6 million euros were payed to Alix in 2006 and 2007. After reducing its workforce, closing a factory and outsourcing production Maerklin is still losing money in 2008. The company was temporarlily unable to service its debt and more lay-offs are scheduled to shore up capital. Stocking manufacturer Kunert is in a similar situation. After paying a lot of money to advisory firm Alix revenues are still declining and in 2007 the company reported a deficit of 14 million euro.

Both firms now want their money back despite the fact that Maerklin owner Kingsbridge recommended Alix for an industry award in 2007, which the firm also promptly received. Klaus Reiners, head of the Bundesverband deutscher Unternehmensberater, is absolutly not aware of any incident where an advisory firm had to reimburse its clients.

CMB, a manufacturer of bio-diesel production facilities, is filing for bankruptcy because a large contractor from Spain refused to sign a letter of credit. That forced CMB into a liquidity crunch which led to the introduction of bankruptcy procedures for the company. Just a short while ago during the days of easy money the company would probably have weathered the financial storm with ease.

This is why we need business cycles. The credit cycle has turned and the chaff is now being seperated from the crop. As the above mentioned examples show, weak corporations with business modells that depend on either the wrong business with the wrong product cycle or whose financial survival depends on one single albeit large contract are in grave jeopardy of closing down. Eventually this should turn out to be a good thing, because it frees up resources which can and will be reallocated when the business cycle turns again.

source: Märklin legt sich mit Beratern an
von Sönke Iwersen,;2022646

source: Ausgleich: CMB stolpert über Spanien-Auftrag

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