This article was published by the McAlvany Intelligence Advisor on Wednesday, June 17, 2015:

Glock 17 9mmPara (erste Ausführung - Februar 1986)

Glock 17

 

Schumpeter’s Gale is the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Often credited with first developing this first axiom of the , Austrian economist Joseph Schumpeter was merely expanding on ’s hopeful prediction that would eventually destroy itself. Out of the ashes would rise .

Marx and Schumpeter were half right: , desire for material reward, free markets, the rule of law, and property rights all combined to set the world on the explosion of wealth and well-being never before seen in history.

It’s too bad that Keith Maib, who is euphemistically called Colt Defense’s “Chief Restructuring Officer,” likely has never heard of Schumpeter’s Gale. If he had he would know that he and his company are in the middle of it, and he would know further that neither he nor it are likely to survive the coming storm surge.

He put the best face that he could on the matter. On Sunday night he issued a press release announcing that Colt was filing for :

The plan we are announcing and have filed today will allow Colt to restructure its balance sheet while meeting all of its obligations to [its] customers, vendors, suppliers, and employees [while] providing for maximum continuity in the Company’s current and future business operations….

 

[This restructuring] will enable us to continue to gain traction on a challenging but achievable turnaround in our business performance and competitive positioning in the international, U.S. government, and consumer marketplaces.

 

Colt remains open for business….

Just how long is an open question. Observers have noted that Colt’s financial condition is so desperate that if a buyer isn’t found by August 3, it will be forced to liquidate itself.

The most obvious signs of trouble surfaced last November when Colt had to borrow $70 million just to pay the interest on its $355 million debt. It bubbled to the surface again a few months later when certain accounting “issues” kept the company from filing its financials on a timely basis.

The end was near when the company offered to exchange its debt for equity in the company. Bondholders voted 9-to-1 against, and the offer expired on June 12.

With another interest payment due on Monday, June 15, and little in the bank to make it, Maib issued the announcement on Sunday night.

The plan is elegant simplicity: find a buyer willing to assume all assets and debts, but at a price that doesn’t completely destroy Sciens Capital Management’s 85 percent equity position in the company. Sciens is making sure by naming itself the “stalking horse,” putting out a bid below which no potential buyer should make an offer.

The clock is ticking. Colt has managed to arrange a short-term $20 million loan to keep its factories operating, but only until August 3. After that, it’s lights out, and the iconic maker of the “Peacemaker” – the “gun that won the west” – will disappear into the footnotes of history.

How Colt managed to sink itself into a sea of red ink during the great bull market in gun sales – with Obama as the world’s greatest gun salesman – is a story of missed opportunities, bad timing, and perhaps just a touch of hubris: the company is 179 years old. What ever could go wrong?

It rode into history with the “Peacemaker” and the 1911 semi-automatic pistol developed by John Moses Browning, selling millions of them to governments, especially the US government, to be used by soldiers in all wars up to and including the Second World War.

But something happened in 1980 that not only caught Colt off guard, so it did to a tool and die maker in Austria. Gaston Glock ran a small company that sold curtain rods and knives to the Austrian government. When he learned that Austria was looking to replace its venerable but outdated Walther P38 9mm semi-automatic pistol, he decided to take a chance and tender an offering on the one-in-a-million chance his government might select his.

His offering outperformed eight other pistols, offered by five internationally known and highly-respected gun makers: Heckler and Koch, SIG Sauer, Beretta, FN Herstal, and Steyr Mannlicher. Notably missing in the competition: anything from Colt.

When he learned that his design was approved by the Austrian government, he went to work immediately at improving his unique design. With a polymer frame and no past history encumbering him with rules about how things have always been done in the gun business, Glock continued to make advances. His 17th iteration became the world’s most popular semi-automatic pistol: the Glock 17.

With its bullet-proof (sorry!) design and simplicity of operation, law enforcement people began switching from Colts to Glocks to the point where it is estimated that 70 percent of LEOs now carry a Glock.

But Colt was focusing on its military business, selling M4s and M16s to governments around the world, especially the US government. However, in 2013 when the US put out to bid its contract for those rifles, FN Herstal got the business, and Colt’s days were numbered. It was too late to catch Glock, and the ending of the contract that had been the company’s main source of revenue spelled the end. Colt was caught in Schumpeter’s Gale.

Even if Sciens finds a buyer for Colt, it is highly unlikely that Colt can return to profitability. Too much time has elapsed, innovation has left Colt behind, the world has moved on.

To the nimble go the spoils. Complacency is death.

—————————-

Sources:

The Blaze: Legendary Gunmaker Files for Chapter 11 Bankruptcy

Colt.com: Colt Defense Announces Fast Track Restructuring

Bloomberg.com: Colt Defense, 179-Year-Old Gunmaker, Files for Bankruptcy

Wall Street Journal: Colt Files for Bankruptcy, Seeks August Auction

Background on Colt Defense

FoxBusiness.com: Colt Bankruptcy Bucks Surge in Gun Sales

Sciens Capital Management website

Definition of stalking horse bid

Glock: The Rise of America’s Gun by Paul Barrett

Background on Glock pistols

History of the Walther P38

Schumpeter’s Gale

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