Does Patrick Byrne's Face Bankruptcy In 2012?

| About:, Inc. (OSTK)

My runner-up for worst stock of 2011, (NASDAQ:OSTK), staggered into 2012 over the weekend with some horrid news: it was forced to stave off imminent default on its bank obligations by forking over more of its scarce cash.

As white collar crime maven Sam Antar pointed out in his blog, the bad tidings, noted in a Form 8-K -- but, predictably, ignored by the Utah media -- were the subject of a spin campaign by the company to make it seem like positive news and not the disaster that it was. This lump of coal in the Overstock stocking leads me to wonder: Will 2012 be the year that Overstock finally slides into bankruptcy?

After all, had it not "renegotiated" its bank lending arrangements, Overstock - run by right-wing conspiracy theorist Patrick Byrne - had faced possible insolvency.

Overstock's desperate straits are reflected in the fact that despite the company's spin, U.S. Bank had actually not done very much "negotiating" at all.

In an article on Dec. 29, the Davian Letter described just how tough a stance U.S. Bank took in its talks with Overstock.

The immediate impact is that they will not default on the 31st, but at a cost. They had to pay $1.2 million in fees for early redemption. Along with the income taxes they would have paid initially, lost depreciation, and the interest (6.3%), this Master Lease has turned out to be a very bad deal for them. Worse yet they had to use $20 million in cash of some sort to buy it back, and that begs the question of where did that come from?

Where indeed. Despite the company's initial contention that its discussion with U.S. Bank was "collegial," it seems that "capitulatory" might be a more apt adjective. "US Bank chose not to negotiate, or they at least offered terms that were worse than OSTK would/could take," noted the newsletter.

Given that the bank "likely has one of the best pictures of how healthy OSTK really is," the tough terms imposed on the company are "possibly the biggest vote of no confidence imaginable."

The newsletter believes that all this indicates that Overstock in the fourth quarter wasn't so hot. Thus, there is a reasonable possibility that Overstock will have to do what bad companies do when faced with a cash crunch: find some dopey investors willing to buy the company's shares despite its grim prospects. Without the continued support of a Canadian fund, Chou Associates, that has been buying the stock, the newsletter calculated that "the share price would likely go well under $6."

That's a heck of a wager to take on a company with a famously erratic CEO, who no doubt will be diverted in the coming months by a Canadian libel suit. Ludicrous as it seems, Byrne on numerous occasions has actually described himself as a "journalist," not as a CEO, and on one occasion he even applied for membership in the Society of American Business Editors and Writers (he was turned down). Running an internet retailer has never been high on his list of priorities, which may be for the best given his abysmal job performance.

Byrne has committed a series of goofs, any one of which would result in the firing of a CEO who hadn't packed his board of directors with cronies. Overstock's costly "" rebranding venture was a disaster, topping AdAge's list of worst marketing debacles of 2011. Another year-end survey found that Overstock had the very worst customer service of any internet retailer.

Bad customer service is very often the tip-off of a company in trouble, as I discovered in a pre-Christmas visit to a Sears (NASDAQ:SHLD) outlet in the suburbs of New York. The store was empty, the computers were on the fritz, the customer service was poor, and the in-store "sale" advertisements were misleading. I was not surprised when I heard that Sears was in such bad shape that it was closing 120 stores.

By contrast, (NASDAQ:AMZN) came out at the top of the list of internet companies in terms of their customer service, and again my personal experience bears this out. Recently I changed my mind about a sweater I purchased after I removed the label. Amazon was kind enough to allow an exchange despite that. Thus, I always go to Amazon for my online purchases, because I feel confident that I can return stuff if necessary.

By contrast, Overstock "has a 60 percent restocking fee for some items that have been used, opened or returned past the holiday deadline. Bigger televisions are not returnable." No wonder this company is in trouble. How can you buy in confidence from an internet retailer that doesn't allow easy returns?

Bad customer service, bad financials, bad management. Bad everything. Is Overstock a kind of online Sears, facing Armageddon? That is the principal question facing Overstock in the year to come. This is a company that declared moral bankruptcy years ago, when it commenced stalking and attacking its critics. Financial bankruptcy would just be icing on the cake.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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