Bankrupt companies generate suffering at scale, even as they spend money like water

I want to share a personal experience I had as an analyst, working with a near-bankrupt company. The completely indifference to what things cost startled me — at least until I realized what was really going on. And there are, surprisingly, lessons in this for what’s happening now at Twitter.

How a near-bankrupt company paid my company way too much

Early in my career as an analyst, I had written a report on the future of television. We then heard from a guy who, it appeared, represented one large manufacturer. The manufacturer had a patent. The manufacturer want to know: how much was the patent worth?

It was possible to extrapolate that value from some assumptions along with a model I had built for my report about the changes in the television market. This wasn’t our typical kind of work, but it was certainly at the edge of my skill set. So I figured out the number of hours it might take, padded it out to account for increases that might occur based on the client asking for revisions, and multiplied it by my company’s highest hourly consulting rate, which was around $8,000 a day. Our sales team quoted the manufacturer a price well into the tens of thousands of dollars.

The client agreed to the price instantly. The sales team was happy. And after a call with the client, I set to work calculating the potential value of the patent.

Shortly thereafter, I walked the client and his associates through the calculations. They asked for some revisions. I made the revisions, which were within the scope of what we’d planned to do.

Then they began to ask for more revisions, and more revisions. I told the sales team that we should charge them extra since the work had expanded beyond the original scope we quoted, and again requested a generous price. The sales team communicated that to the client, who once again instantly agreed to the cost.

This was well outside my experience with other clients, who appeared to have budgetary limits on what they needed. This client didn’t appear to care . . . and he was working for a company in serious financial trouble.

Eventually, the client requested that I come to their offices and work through the model with their whole executive team. Of course, that visit was priced at the cost of a day of consulting plus travel, which was in excess of $10,000. And again, the client instantly agreed to the budget.

On the eve of my trip, I learned two things.

First, the company was in even worse shape than I had known. It hadn’t made a quarterly profit in nearly a decade. If it wasn’t bankrupt yet, it surely would be soon.

And second, the client wasn’t actually the company. It was some sort of banker working with the company on a financial transaction. He was very well dressed.

When I arrived at the company’s offices, what I saw was just what you would expect from a company that had been in dire financial condition for many years. The building was old, run-down, and dirty-looking. The phone system appeared to be at least a decade old. The conference room was shabby. The people, including senior managers and engineers at the company, were bright, though, and I was able to engage them in a serious discussion of the value of the patent and the assumptions that my estimate was based on.

Eventually, I figured out what was going on. The company and the banker needed an unbiased assessment of the value of the company’s assets to prepare for selling it through some sort of bankruptcy deal to another entity. I was on the hook to produce that assessment. Nobody inappropriately lobbied me one way or another — it truly was an expert unbiased assessment.

But the financial transaction was valued well into the hundreds of millions of dollars. The financial “advisors” to the transaction got a nice cut of that. When you’re talking about a nine-figure transaction, the cost of a consultant like me, even at nearly $1,000 per hour, was trivial. Of course they didn’t care about whether they paid my company $50,000 or $100,000; that was not even a rounding error.

I felt guilty about all the people who’d lost their jobs at the company and the sad state of their working space. These were talented people who, I’m sure, were being told to cut expenses to the bone. On the other hand, my salespeople were happy and I made my quarterly consulting goal on that project for several quarters running. Because while the company needed to watch every dime, its bankers were quite happy to pay generously for whatever consulting was needed to close the huge deal. It was honest work. But I still felt weird about it.

What this means for a company like Twitter

I think about this experience whenever I read about a company in serious financial trouble, as Twitter is now.

I’m sure Twitter will end up saving a billion dollars or so in payroll by laying off half of its staff. And there are people there figuring out ways the company can either save hundreds of millions of dollars in costs or generate hundreds of millions of dollars in revenue. After a financial transaction like the one Elon Musk just executed, that has to be an urgent task.

But I’m sure that there are plenty of high-priced consultants and outsiders making bank on this. Somebody is likely charging costs for private jets or first-class travel or housing or some other ancillary expenses. (I want to be clear: I have no inside information about this, but it wouldn’t surprise me at all.)

In a multi-billion-dollar transaction, nobody cares about $100,000 here or there.

The people they’re trying to hire back can probably drive a pretty hard bargain, since there are not that many of them. In the end, it won’t matter if that costs Twitter $5 or $10 million.

There’s always money to be made in a financial transaction for a going concern, even if it’s unprofitable.

The suffering of the staff occurs at scale, since that’s necessary for the financial transaction. But there’s always lots of money sloshing around at the same time, with consultants ready to skim it off.

From a rational perspective it doesn’t make sense. But from a financial perspective, it does.

It still bothers the hell out of me.