It was probably only a matter of time before we started seeing headlines about high-tech companies having deep financial problems. The hangover from the recession, concerns about weak market demand, worries about another global economic downturn, and uncertainty in the lending environment could spell trouble for many.
Even so, I was caught by surprise to see how quickly things appear to be unraveling at Elcoteq Network Corp. The company, which offers electronics manufacturing services (EMS) and after-market support services to OEMs, was declared bankrupt last week by a Luxembourg court. The decision came on the heels of a filing the previous day.
In an Oct. 6 statement, Elcoteq said many of its problems stemmed from issues with lenders:
During the last months, the Company had entered into discussions with the revolving credit facility lenders as well as the Company's key customers in an attempt to save the Company. Despite... continuous cost reduction measures and thorough efforts to restructure the Company's debt, Elcoteq was unfortunately not able to find a solution that would have been acceptable to the revolving credit facility lenders. The proposal for a recovery plan set forth jointly by Elcoteq and its key customers was rejected by the lenders, who required the Company's customers to waive their rights and increase their exposure instead. Approximately 15% of the original 230 million euro revolving credit facility remains outstanding. The lenders continued their enforcement actions against the Company by freezing the Company's bank accounts, by preventing the Company's payment transactions as well as by preventing the accounts receivable to be paid to the Company. As a consequence, Elcoteq SE is no longer able to continue its operations and there are no longer any prerequisites for the Company to continue the controlled management procedure in Luxembourg.
On second thought, maybe Elcoteq's deterioration hasn't happened so quickly. Indeed, there have been a string of press releases marking the downward spiral for several months. In May, the company lowered its second-quarter and full-year outlooks. It cited "the weaker development in sales due to the delay in securing the long term financing of the company" as the major reason. "The result is further heavily burdened by the exceptionally high costs of the current financing."
In August, Jouni Hartikainen resigned as Elcoteq's president and CEO. "According to Mr. Hartikainen, his ability to manage the company and to objectively safeguard the benefits of all the company's stakeholders became impossible due to the recent actions by the revolving credit facility lenders," the company said.
A few weeks later, Elcoteq's three Finnish subsidiaries -- Elcoteq Finland Oy, Elcoteq Lohja Oy, and Elcoteq Design Center Oy -- filed for bankruptcy protection. In September, we learned that another subsidiary, Elcoteq Network SA, had followed suit. This subsidiary was in charge of the company's material purchases and customer invoicing in Europe.
It's easy to point fingers at credit facility lenders and blame the lack of long-term financing -- a legitimate concern, given the global economic situation. However, there are other issues to consider. Looking even further back in time, Elcoteq has long had ties to the mobile handset market, a niche dictated by high-volume, low-margin churn. Companies that compete for this slice of pie fared well when customers like Nokia were doing well. Without superior supply chain capabilities or sufficient differentiation, Elcoteq was bound to find it harder to hold its ground, as Mark Zetter of Venture Outsource pointed out in a research report.
On a broader scale, Elcoteq's experience may well signal what's yet to come for many others in the industry. According to a September report from the global business advisory firm AlixPartners LLP, 44 percent of high-tech companies still face the risk of financial distress (the likelihood of default or bankruptcy within two years, if aggressive corrective actions are not undertaken). That figure, down only slightly from 49 percent in 2009, represents 56 percent of industry revenue that is at risk, the firm said.