Going over the Edge in Europe

Ailing companies are dropping fast

Sylvain Forestier is an emblem of French entrepreneurship. The 42-year-old Parisian is the founder of D interactive, a technology consulting and marketing company that he built into an $80 million-a-year business, with operations across Europe. He also heads the French chapter of GrowthPlus, an advocacy group for Europe's high-growth companies. But give Forestier a call nowadays and he's likely to give you an earful about French bankruptcy laws. After 16 years in business, D interactive went belly-up last October.

Forestier's company is only a droplet in a record wave of business bankruptcies crashing across Europe. More than 150,000 European companies were declared insolvent in 2002, a 10.7% increase over the preceding year and nearly four times the 38,500 business bankruptcy filings in the U.S. in 2002. A few Old World bankruptcies, such as Germany's KirchMedia and British food giant Albert Fisher Group, made headlines. But most of the victims, from Finnish lumberyards to German stationery manufacturers to French sorbet makers, were smallish companies that sank with barely a ripple.

What's dragging them down? A key factor is Europe's sickly economy, which grew less than 1% last year, pushing many ailing companies to the point of no return. Another is European banks, often in rocky financial shape themselves, which are balking at extending credit to troubled businesses. That's understandable. In fact, bankruptcy, if properly applied, is an economic tonic, weeding out inefficient companies, freeing up financing for up-and-comers, and giving a second chance to entrepreneurs who have learned from their mistakes.

But critics complain that even relatively healthy companies are being pushed into liquidation. That's because few Old World countries have laws resembling Chapter 11 of the U.S. bankruptcy code, which allows a company to operate under court protection while it reorganizes. Almost one-third of U.S. business bankruptcies are filed under Chapter 11. But in Europe, the vast majority of bankruptcies lead to liquidation, even if the filing was triggered by a short-term liquidity problem. The European Commission says that one in four European business bankruptcies is caused by customers failing to pay their bills on time. True, in some cases a Chapter 11-type scheme might only prolong a company's death throes. But, says Bruno Vanryb, president of MiddleNext, an association of French midsize companies: "We're seeing thousands of needless bankruptcies, and the situation will only get worse if we don't react."

Consider the plight of D interactive. Founded in 1986 by Forestier and a couple of pals, it grew rapidly through the 1990s and made a string of acquisitions in Britain, France, and Sweden. Growth slowed after the technology slump hit, and in 2001 the company posted a $2.5 million operating loss on $80 million in sales. But what killed D interactive, Forestier says, was its inability to keep up with payments on bank loans it had used to finance acquisitions. The company filed for bankruptcy after banks refused to renegotiate terms on the loans. German media group Bertelsmann recently agreed to acquire the company for an undisclosed sum. "With a sort of Chapter 11 arrangement, we could have avoided all this," Forestier says.

That's why Forestier and other European business leaders are pushing hard for bankruptcy reform. At the urging of business groups, the European Union has ordered member countries to enact legislation making it easier for companies to collect from late-paying customers. In France, MiddleNext and GrowthPlus are lobbying for a Chapter 11-style law, and they hope the center-right government elected last year will be more receptive than the past Socialist one. Spain's Parliament is already considering legislation to replace that country's 80-year-old bankruptcy law. Germany passed a new insolvency law in 1999 that makes it easier for companies to restructure and survive. But so far, few companies have used it. "There is a big cultural problem," says Michael Bretz, research director at German credit-rating group Creditreform. "In most of Europe, bankruptcy is seen as ruin."

Overcoming such resistance could take a long time, though, and in the meantime, 2003 is shaping up as another grim year. French business insolvencies in January and February were running 25% above the same period in 2002. If that keeps up, the wave of bankruptcies could become a tsunami.

By Carol Matlack in Paris, with David Fairlamb in Frankfurt

    Before it's here, it's on the Bloomberg Terminal.