PAM MACKINNON PROFILE
Company: Americ*n Conser *toryThe*ter
Position: Artistic director
Age: 53
Hometown: Buff*lo, N.Y., *nd Toronto
Residence: S*n Fr*ncisco
Education: B*chelor of Arts in economics *nd politic*l science, Uni ersity of Toronto
Many companies have filed for “Chapter 11” bankruptcy protection — including J.C. Penney, Chesapeake Energy, Hertz, Neiman Marcus and Brooks Brothers (and much longer ago, Polaroid and Texaco). These businesses often end up with super-depressed stock prices, which can tempt some investors. Here’s why you should steer clear.
Companies filing for bankruptcy protection are generally in trouble — often deep trouble — and may have issues paying their bills. Chapter 11 allows them to keep operating while reorganizing. Some of them will turn their businesses around and end up stronger than before, while others won’t. The latter may end up in “Chapter 7” — which means they’ll be liquidating assets in order to pay creditors.
Chapter 11 permits a company to hang on to its assets under the supervision of a court-appointed trustee. It must file a reorganization plan with the bankruptcy court. Any creditors in line to receive less than all they’re owed can vote on the matter. After the vote, the court can accept or reject the plan. So companies do have some flexibility, but if they offer creditors too little, their plan may not be approved.
Companies typically raise money to pay creditors by selling off assets. But they’re unlikely to be able to pay all debts in full, so creditors sometimes accept a partial repayment and/or some stock in the new, reorganized company.
That new, reorganized company usually emerges from bankruptcy protection with new shares of stock, leaving former holders of common stock with shares that are now worthless. Some or all holders of preferred stock may receive some payment, but even they rank lower in repayment order than debt holders, merchant creditors, trustees, employees and the IRS.
Avoid any companies in or near bankruptcy — and consider selling any shares you own, as they’re likely to end up worthless. Even if a company emerges and succeeds
— as many, such as General Motors and Delta Air Lines, have done — it will beasanewentity.Stick with healthy and growing companies.
Economists concerned about slowing productivity have spent the past decade hotly debating the value of free digital services such as Google’s web search and Amazon’s online store. But those online services have proven their worth during the pandemic. And COVID-19 may ultimately push our society to learn new ways of using digital technologies that accelerate productivity growth.
Over the past year I’ve been occasionally bombarded with tweets casting doubt on the value of software companies. The allegation that online services didn’t help with the pandemic came on top of a preexisting concern — prevalent among some economists, as well as critics of the technology industry — that these services add little to the real economy.
But let’s do a scary little thought experiment. Try to imagine what 2020 would have been like without Google, Amazon, Zoom, Slack or any of the other online services. It’s pretty terrifying.
First, because Amazon wouldn’t exist (nor would any other online marketplace), everyone would have to buy everything in physical stores. Imagine the lines stretching around the block as impatient maskwearing crowds stood 6 feet apart, waiting hours for the chance to buy some toilet paper or soap. Not only would this be an incredible inconvenience, it would increase the risk of infection. And because many people would probably delay their purchases of furniture and appliances until after the pandemic, the economy would suffer more.
People would also have to go in to their offices. With no Zoom, Slack or other remote management tools, the companies that currently have their employees working from home would have had to either halt operations — hurting the economy even more grievously — or find some way to bring them in. People congregating in offices would spread the disease, especially before everyone realized the importance of ventilation and the fact that 6 feet of distancing isn’t enough. Of course, this was still the reality for many essential front-line workers, but through remote work, at least some fraction of Americans managed to avoid it, helping sustain much of the economy.
And without online communication tools that allow you to see the faces of friends and family and hear their voices, imagine how much lonelier people would have been during social distancing.
Finally, imagine looking for information about
COVID-19 without Google, Facebook and other disseminators of free online news.
So when you think about it, it’s pretty incredible that these online services were invented just in time for a once-in-a-century pandemic. Though some have pooh-poohed Silicon Valley’s usefulness in the era of COVID-19, the advent of these software companies utterly transformed America’s ability to weather a plague.
So we should think more carefully about the value of free digital services. In recent decades, academics have debated whether products that are free to users — Google, Facebook, the basic versions of Amazon and Zoom and Slack — create more economic value than the official numbers record. Productivity growth has been slowing down in the last decade and a half, which leads many people to ask how that can happen when we have all this fabulous innovation. But productivity measurements depend on the price people pay for things; if people don’t have to pay, there may be value creation that the statistics miss.
The U.S.’ reliance on online services to get it through the pandemic might be one reason its economy suffered less than others, and is now on track to bounce back faster than most. Of course, just how much digital services contributed to the U.S.’ outperformance is a question that needs research to answer. But it illustrates the principle that we can’t rely only on normal times to judge the value of innovations. Sometimes technologies act as insurance policies — a way of backstopping society against disaster.
What’s more, the pandemic might dramatically increase the productivity of digital services going forward.
In a similar way, the social distancing that COVID-19 forced on society might be teaching us how to use online services in a more productive way. Remote work could allow companies to distribute their workforces to low-cost locations, and could nudge them to reevaluate the necessity of many meetings and routine office tasks. A shift from brick-and-mortar business to e-commerce might cause supply chains to become less fragmented.
So in addition to creating resiliency against COVID-19, Silicon Valley’s digital service products might ultimately allow a transformation of our economy that was difficult to envision in the pre-pandemic days. Software might be only beginning to show its worth.