When Apple supplier GT Advanced Technologies Inc. of New Hampshire crashed 90 percent on Monday, it was the climax of several beautiful aspects of market capitalism unfolding.
First, the reason for the crash: The supplier of sapphire equipment for the iPhone’s fingerprint scanner and camera lens just filed for bankruptcy—and nobody saw it coming. Why? Because the stock traded as high as $11.27 (total company worth: $1.5 billion) on Friday before crashing to a low of $0.75 (total worth: $114 million).
It wasn’t a gentle string of bad news with the filing at the end. Instead the filing came out of nowhere.
Tom Gutierrez, president and CEO of GT found some optimistic words: “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,” he said.
Maybe that’s because he was able to unload $10 million worth of shares in 2014 alone. The last transaction was on Sept. 8 at a price of $17.39. Of course, when we said nobody saw it coming, that’s not entirely true, as his transactions prove. Insiders have been fleeing the sinking ship since 2013, with not a single insider buying.
So what did the insiders see that others didn’t? Not that the company didn’t have any earnings or cash flow. Even the couple of institutional investors owning the majority of the company could have that figured out.
It could have been the fact Apple wasn’t going to use the sapphire material for its screens, but just the camera and fingerprint sensor.
Jim Cramer certainly did not consider that a possibility when he said he wanted a screen that doesn’t break: “I want sapphire,” he said, and recommended the stock, at a price of $18.88 on Aug. 26.
Well, he didn’t get his sapphire screen, which the insiders probably knew ahead of time, as insider selling intensified throughout July and August. The stock held above $10 even after Apple announced it wasn’t going to use the full sapphire screens in September.
Pull the Plug
However, that likely wasn’t the reason for the abrupt Chapter 11 bankruptcy filing. According to Jeffrey Osborne, an analyst with Cowen & Co., Apple pulled the plug on a $578 million interest-free loan, which it had extended as part of a supply arrangement. This means that Apple wanted to have the money back ahead of time.
This makes sense as the balance sheet doesn’t cite many other liabilities apart from a convertible note offering, which seldom is callable by the investor.
Osborne thinks GT violated some terms of the loan agreement and Apple headed for the exits, knowing full well it would bankrupt the company. According to the old adage, it helps to panic first, and Apple is looking good.
At the last filing on June 28, the company owed Apple $306 million but had $333 million in cash and cash equivalents, enough to pay back the loan, which is likely to be serviced ahead of obligations to more than 5,000 other creditors.
For everybody who wasn’t invested in GT, the story includes everything Wall Street has to offer: An overvalued and overhyped tech company; an ill-fated buy recommendation at the top; insiders heading for the exits before the public knows anything; an industry behemoth bankrupting a company for a paltry sum compared to its size and cash holdings. And thousands of suckers left holding the bag.