Broken sapphire

Can GT Advanced Technologies live again?

In John Lanchester’s new book, How to Speak Money, “bankruptcy” is defined as “The legally managed process for going broke.” Which, while true as far as it goes, is a little bit on the tautological side —and even a little bit misleading. For when it’s done well, for instance when both General Motors and Chrysler entered bankruptcy, it can be a very effective way of getting out from under a nasty debt load and emerging much cleaner and shinier on the other side.

Certainly one side effect of bankruptcy is that ownership changes. The people who owned common stock are generally losers in the deal, while former creditors, depending on where exactly they sit in the capital structure, can come out very well, and often end up controlling the entire company. (That, for instance, is how Richard Perry ended up buying Barneys: not by buying the company directly, but rather by buying its debt in the shadow of a potential bankruptcy filing.)

So what’s going on with the bankruptcy of GT Advanced Technologies, the company which was meant to provide sapphire screens for Apple devices? The official spin is positive:

“GT has a strong and fundamentally sound underlying business,” said Tom Gutierrez, president and chief executive officer of GT. “Today’s filing does not mean we are going out of business; rather, it provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet.
“We are convinced that the rehabilitative process of chapter 11 is the best way to reorganize, protect our company and provide a path to our future success. We remain committed to our roots in innovation and our diversification strategy. We plan to continue to operate as a technology leader across our core set of businesses.”

The key word here, in case you didn’t notice, is “core”. The backstory here is that GT was historically just a manufacturer of the equipment needed to make sapphire; it didn’t make sapphire itself. But all that changed when it signed a series of agreements with Apple, including a $578 million loan from Apple to GT, which was used to build a sapphire production facility in Mesa, Arizona.

The stock market loved this, and bid up GT’s stock; the hope was that Apple would use GT’s sapphire for its phone screens, and that GT would make a boatload of money, and that GT’s shareholders would end up making a fortune. Of course, it didn’t work out that way. The screen on the iPhone 6 is glass; the company had no minimum purchase obligation from Apple; and, evidently, it ended up dawning on GT’s executives that this whole adventure of making sapphire rather than just making the machines to make sapphire was probably not a good idea.

But at this point, GT had a whole bunch of what it calls “oppressive and burdensome terms and obligations”, mainly to Apple, and the only way to get out of those obligations was to declare bankruptcy.

The rise and fall of GTAT stock

The best way of judging what this means for GT in the long run is not to look at its share price. After all, it says that it is “seeking debtor-in-possession financing” — which means that existing shareholders are likely to retain very little of the company, when all is said and done.

Instead, we should look at GT when (if) it comes out of bankruptcy, and compare it to its status before the sapphire-manufacturing misadventure. The company, and its shareholders, will have learned an expensive lesson, both about the perils of manufacturing and about the dangers of signing contracts with Apple, which generally strikes notoriously harsh bargains. But it might yet live on, under mostly new ownership, doing what it always used to do in the past.

As for the rest of us, it’s possible that the GT bankruptcy filing will provide a rare glimpse into the kind of obligations that Apple imposes on its vendors. If Tim Cook is legendary for anything, it’s honing Apple’s supply lines to a level of efficiency the tech world has rarely, if ever, seen. Where “efficiency”, of course, means that Apple’s vendors make much less money than Apple does. As the GT bankruptcy wends its way through public court, we could yet learn a fair amount about what it’s really like to find yourself on the other side of a vendor contract with Apple.