The neighborhood electronics convenience stores RadioShack owned by General Wireless Operations Inc filled its second bankruptcy. This barely comes two years after its first filing for bankruptcy in February 2015, forcing them to close shop and give way to partnership with wireless provider Spring Corp. Bankruptcy is a legal status of a person or other entity that cannot repay debt to creditors, can be voluntary or involuntary which is offered by the court or imposed by the creditors (Thomas, 2015).
RadioShack bankruptcy filing was voluntary, which was influenced by a lot of factors but of importance will be failing to keep up with time and pricing. RadioShack focused on selling their commodities at a rate that profited them and proved expensive for others. Their pricing also played a key role with RadioShack almost doubling the cost of its products in comparison with its competitors, giving the competitors a dominating factor in the market with customers opting to buy the cheaper products from their competitors like Amazon (Thomas, 2015). This was greatly seen in the mobile selling department, with poor performance across it shops with Amazon and other companies topping the list of best sellers.
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Closure of 200 stores with the aim of reorganizing and evaluation of its option in the remaining 1300 stores to maximize values to their creditors was the best option. The reorganizing and listed assets and liabilities amounting to about $500 million to $100 million, upon entry to the U.S bankruptcy court for Delaware district. Ringing to account the method used to compensate to compensate the investors (Brown, Ramakrishnan, & Iye, 2015).
The cost of financing increases with asymmetric information, this is per the pecking order module. This module states that the manager knows more about the company’s risks and values than the outside investors. Finances come from 3 sources; new equity, debt and internal funds. With internal funds being the first preferred option, followed by debt and new equity respectively (Brown, Ramakrishnan, & Iye, 2015). This module of payout maintains that the hierarchy of financing sources should be adhered to by business, internal financing should be prioritized when available, and debt should be prioritized when selecting external finances over new equity. Hence, making debt as the signal that the company requires external finances.
Asymmetric information affects the choice of financing between internal and external and also affects the form opted for when occurring the external finances. However, asymmetric information should always fever the debt over the equity. Debt brings confidence to the board that the venture is gainful and the current stock is underestimated. In contrary, new equity will precipitate lack of confidence by the board and feel the share price to be over-valued.
RadioShack in their bankruptcy filing filled a voluntary chapter 11 bankruptcy, which was a suitable option for them. Chapter 11 allows the company to reorganize their debts and continue with normal operations (Arren, Bussel, Skeel, & Jordan, R. L. 2012). RadioShack was a partnership between General Wireless Operations Inc and Spring Corp thus subjecting it to only one option when it was declaring for bankruptcy, companies that are subjected to alliance have only this option.
Despite RadioShack filing for chapter 11 bankruptcy, the firm involved in liquidation of supplier's inventory and store fixtures together with auctioning off old memorabilia. The partnership with Spring Corp ended with the creditors of RadioShack suing Spring Corp for sabotaging its co-branding location by building newly-built sprint retailer stores. This stores newly destroyed over 6000 RadioShack jobs.
General wireless announced to auction the company name and IP June 2017, Continuation of bidding ended with Kensington Capital Holdings obtaining the radio shacks brand and other intellectual properties for $15 million. General wireless officially exited bankruptcy in October 2017 and was allowed maintain warehouses, dealer operations, and up to 28 stores. Currently, the store location on RadioShack is the only website listed. Poor management of acquiring the company external finances is what lead to the demise of the company.
References
Arren, W. D., Bussel, D. J., Skeel, D. A., & Jordan, R. L. (2012). Bankruptcy. New York, NY: Foundation Press Thomason/West.
Thomas, Z. (2015). Deal: RadioShack bankruptcy Saga . Intl fin. L. Rev 34 , 10
Brown, N., Ramakrishnan, S. & Iyer, R. (2015). RadioShack files for bankruptcy, sell up to 2400 store. Reuters. Retrieved on 15 March 2018, from https://www.reuters.com/article/radioshack-bankruptcy/radioshack-files-for-bankruptcy-sell-up-to-2400-stores-idUSL1N0VF3HP20150205.
