FAC 12 - Ch. 1 - Blockbuster expected to file for bankruptcy within days

link: Blockbuster Expected to File for Bankruptcy Within Days

Summary

The article I read was reported by Vancouver Sun commenting on Blockbuster’s imminent filing for chapter 11 bankruptcy (a bankruptcy code that allows reorganization) on account of customers moving away from renting films through its stores and online service. Blockbuster is holding approximately $900 million debt; however, the senior debtholders have recently announced that they would convert about $630 million of debt into shares of common stock so that the debt turns into equity of the restructured company. Unfortunately, the other bondholders would be wiped out. Moreover, the bondholders have agreed to provide a loan of $150 million to support the recapitalization of the business, believing that there is still much room for the model. While film studios have no concern about selling films through online service or store, landlords who have taken back their leased properties from Blockbuster would suffer from a buyers’ market for their properties.

Connection

The connection to the first chapter is the investing and operating activities of businesses. In the case, Blockbuster is holding approximately $900 million debt, and all these financial problems probably emanated from the company’s operating activities and investing activities. The shrinking of the business of physically renting films results in a dramatic decline in sales revenues. Fewer customers prefer buying and renting films from blockbuster because the online services such as Netflix outperform that of blockbuster, causing a decrease in profit from operating activities. Moreover, Blockbuster invested most portions of the funds in physically-renting market instead of online service, and it started closing stores since earlier this year. Going in the wrong direction when investing is another reason why blockbuster is suffering from a tremendous debt. Furthermore, another connection to the text book is Income statement. The information shown on the income statement indicates the operating performance of a company over a period of time. Too much expenses, but relatively less sales revenues, indicates that the business is losing money. Undoubtedly, another reason why blockbuster is going bankrupt is because it has excessive expenses and inadequate sales revenues.  

Reflection

The financial failure of this corporation reminds me of how complicated the economical environment is, but it also makes me ponder how the changes in society and the development of technology can affect the outlook of economy. In my opinion, blockbuster should use the money that the bondholders convert into equity to develop its online service in order to make profit from its sales. The old way of selling and renting films through stores becomes less compatible with the new technology, so new investment strategy should be set up to catch up the pace of global development. From my perspective, management should keep a close eye on the total expenses and sales revenues and make sure the company possesses adequate floating capital in order to avoid excessive debt which would lead to bankruptcy. In addition, the bankruptcy of Blockbuster should alarm other similar companies such as Netflix and Rogers, indicating that the market might be shrinking gradually. Moreover, under the influence of global recession, companies like Blockbuster and Netflix need to develop better quality of service and technology to support and expand their business, otherwise there is a great chance of being eliminated by other more developed and more mature companies.