The response to last week’s post was absolutely overwhelming -- more than 7000 reads on the site alone -- and I’m so grateful for everyone who took the time to read, comment, email, and share their thoughts. Since then, FPN have bravely deleted most of the original discussion thread about the decision and, in a nicely vindictive touch, prohibited me from commenting on the site. I suppose over in FPN-land, when people complain about censorship the only solution is to delete the criticisms and silence those who complain. No wonder that that site is so bereft of passion or joy these days and so many users have moved on to other sites.

So, sadly, it has happened. Word came through last night from one unofficial source, then another, and then Luca Baglione, Omas’ sales manager, posted this and I think that’s about as official as we’re going to get. After 90 years in business, it seems that Omas has begun laying off staff and the transition to bankruptcy. In today’s post, we’ll look at the brand’s final years and try to figure out what was going on and what ultimately brought them down.

Before we get started, I want to say two things. First, the information for this post came from the public records of Omas, O-Luxe, and Hengdeli Group, as well as from a few corroborated tips. I’ve not spoken to anyone directly employed by those companies so you should regard this post as speculative (albeit well-informed speculation). Second, it’s worth remembering that fountain pens are a beloved hobby for many of us — but it’s also a business. And the best decisions from a business point of view may not be the decisions that our emotions and sentiments want to see made. That doesn’t make them bad decisions, it doesn’t make them incompetent decisions. It just means they were necessary decisions, made by people doing their best in situations which were well beyond their control.

Background

This story involves Omas as well as its past and present owners. Two of those owners, Hengdeli Group and Ming Fung (later renamed O-Luxe), are listed on the Hong Kong stock exchange. For many publicly-traded companies which are based or primarily operate in China, it’s preferable to be listed outside of China. Largely because the capital markets are much deeper and the investment community is much larger in the United States or Europe. The Hong Kong exchange in particular picked up a lot of this business, partly because of its proximity and integration with China — but also because the regulatory environment there was much weaker. In addition to perfectly legitimate businesses, this has attracted companies which prefer to operate in an environment were regulations are only weakly enforced, including outright frauds. (One of the most recent examples is Hanergy, a solar panel manufacturer which was suspended in May and remains so.)

Now, I’m not saying that either Hengdeli or O-Luxe are fraudulent companies, nothing of the kind. But I am saying that part of the background for this post relies on information from their annual reports and stock exchange announcements, which I don’t consider to be anywhere near as reliable as disclosures made to better regulated exchanges, like the ASX or NYSE. The information may be perfectly legit, it may be totally unreliable, but as an outsider it’s really hard to tell the difference. So just take some of this with a grain of salt.

Nonetheless, our story begins with Hengdeli’s sale of Omas. At the time, Hengdeli were China’s largest distributor of luxury watches. They had purchased a majority stake (89.9%) in Omas back in 2007 and, by 2011, were ready to sell. It was obvious at that time Omas was a troubled company: in 2009, their costs were almost double their revenue and the business made a loss of €1.5m. The following year they managed to increase their revenue but still posted a €1m loss, so it’s fair to say the situation had improved but it was still fairly dire. I’m not surprised Hengdeli were keen to get out of the business, and looking at the numbers it’s hard to escape the conclusion that Omas was already living on borrowed time, a good five years before its actual demise.

It’s hard to tell if Hengdeli and Ming Fung were totally independent entities when they agreed to the sale. They both claimed to be, but those claims don’t necessarily have much credibility. Assuming they were independent, Hengdeli must have been thrilled to find someone willing to buy. Once the terms of the deal had been agreed in September 2011, they put out a statement saying they had decided to sell to “achieve breakthrough development”. You can see what I mean about the Hong Kong exchange having low standards, because this statement seems to be absolutely meaningless.

The Acquisition Strategy

I can kind of understand Ming Fung’s reasons for the acquisition. Their principal business was designing and manufacturing jewellery for other brands, and in the years before the Omas acquisition they’d decided to expand upstream and downstream. Upstream, they acquired a couple of Chinese gold mines. Downstream, they began acquiring the Chinese distribution rights for some jewellery and watch businesses.

Picking up Omas complemented that strategy quite well. Not only were they picking up the distribution rights to Omas in China, enabling them to expand the scope of their business into writing instruments, but they were also picking up the brand and manufacturing side of the business. And a prestigious, respected brand it was indeed.

I think Ming Fung were sick of manufacturing product for other brands to sell and wanted to start making product under their own name. They already knew how to design and manufacture jewellery, but they didn’t have the brand recognition to bring their own product straight into the luxury market. Omas gave them a brand name which might not have been well-known outside of the pen industry, but had the prestige and history which could be redeployed to jewellery. It gave Ming Fung the cachet which they otherwise would have had to build up from scratch.

It also gave them something else that was pretty desirable. The manufacturing side of Omas wasn’t totally owned by Hengdeli; they had bought it from Louis Vuitton Moet Hennessy (LVMH) in 2007, and LVMH held onto 9.9% of the business as a joint venture. By buying up Hengdeli’s share, Ming Fung were getting themselves into an association with Louis Vuitton. For a business trying to shift into the luxury products market, LVMH is probably not the worst company to be associated with or have opportunities to learn from.

So it seems there was a strategy behind the acquisition, one which is reasonably coherent on the information that is available. But what surprised me were the numbers involved: all in, Ming Fung purchased Omas for US$50m, a fairly astronomical sum — particularly for a company which was making heavy losses and already running the risk of closure.

I thought we should probably pick apart this valuation to help explain how a business could go from a $50m valuation to $0 in just over four years. $12m of this price was the repayment of a loan provided to Omas by Hengdeli and the rest seems to have been the acquisition value of the business.

Another obvious contributor was a profit guarantee from Hengdeli. If Omas failed to come good in the next three years, Hengdeli committed to paying Ming Fung as much as $15m. Ming Fung put this on the books and estimated that they’d probably get paid out around $13.75m, which you can read two ways: one is that they really weren’t that optimistic about Omas turning much of a profit anytime soon; the other is that they actually seemed to think that it could be profitable, even in a very small way. I suppose its a glass is half-full/half-empty thing.

Another contributor to that price would be Ming Fung’s decision to pay in shares rather than cash. Businesses will often do this as it saves them having to go out and borrow money, which is expensive, or conduct another share offering, which is expensive, time-consuming, and invites a whole lot of scrutiny. Instead, Ming Fung just issued more shares, diluted the existing shareholders, and hand those new shares over to Hengdeli. Hengdeli still get paid but it’s an immediate cost to Ming Fung’s shareholders rather than an expense which goes on the books. (For the record, it’s also something that shareholders vote on, and they approved the plan.)

Getting paid in shares rather than cash is a little risky for a seller. If the buyer’s stock price goes to zero, it means you were effectively paid zero. So you might ask for some additional compensation in exchange for taking on that risk. This takes the form of additional shares. I’m not sure what amount of compensation is appropriate in this situation nor what Fengdeli managed to get out of Ming Fung, but I wouldn’t be surprised to learn that it was a pretty substantial number — particularly given that the Ming Fung share price had fallen 34% in 2011. Maybe Fengdeli would’ve been willing to sell for $40m (including the $12m loan repayment) if the sale had been completed in cash, but asked for an extra $10m to accept payment in shares. Maybe it was more, maybe it was less, but there definitely had to be some compensation for taking on all that risk.

So we can put this information together to start picking apart that $50m pricetag. Once we remove the loan repayment ($12m), profit guarantee ($14m), and share price risk ($10m), we’re left with a $14m price tag. From that we can also subtract the firm’s net asset value — the sum of all of their assets, including cash, office equipment, machinery, inventory, etc (approx, $10m) less any other debts, like rent still owning or employee entitlements ($3m) — and we’re left over with $7m. Ming Fung claim that this amount represented the value of the Omas trademarks and reputation at the time. It’s certainly a very big number.

Looking at all this, we can say that Hengdeli were paid stock worth $50m to get rid of a business which was losing serious amounts of money and, in all likelihood, would have been closed in late 2011/early 2012 if a buyer had not been found. For Hengdeli, this really seems like a pretty spectacular deal and I’m sure they felt extraordinarily lucky to have found this buyer.

For Ming Fung, I assume they felt the price tag was a big one but a price worth paying if it enabled them to start building their company into the luxury jewellery brand which they hoped to become. This move was essential to their strategy of transforming their business and so it was a necessary, worthwhile acquisition.

After the Acquisition

Suffice it to say the next few years did not proceed according to plan. As far as I can tell, the plan to develop a jewellery line for Omas never came to fruition — there is some marketing material about their fine jewellery products, sponsorship of the 2012 Special Olympics, even a flagship store in China (which carried several brands the company distributed, including Omas, but there’s no evidence of Omas jewellery), but I’ve been unable to find any photos or proof that the jewellery was made available for purchase. Certainly there doesn’t seem to be any trace of it being launched outside China.

I suspect I know the reason why all of this fell apart. It’s not the weakness of the Chinese economy (though that’s probably a contributing factor) and it’s not because of anything the company did wrong internally. Instead I think it’s all down to one man: President Xi Jinping. You might find it a little absurd to lay the blame for Ming Fung’s failed strategy at the feet of the Chinese leader but I think it’s a credible argument and more convincing than anything else I’ve heard or read.

Xi became head of the Central Committee of the Communist Party of China in November 2012, in preparation for his ascendancy to the Chinese presidency early the following year. You might remember his inaugural speech, which got a lot of attention in the media at the time: he announced an anti-corruption campaign in which he vowed to target both ‘tigers and flies’: in other words, he publicly vowed to go after high-ranked and low-ranked civil servants who were corrupt. And, unlike most politicians who announce crackdowns, he followed through with it — more than 100,000 people have been indicted for corruption in China since the announcement.

Corruption in China is not necessarily how you might imagine it, where an official is given a brown paper bag full of cash. In China, corruption can take multiple forms: it can mean bribes, the provision of personal favours, a gift of shares in a private company (one which may be later awarded lucrative government contracts), or simply the diversion of public funds to private bank accounts. But often it means elaborate gifts which act as symbols of friendship and goodwill. For example, a businessman might show he values the friendship of a powerful local official with the gift of a diamond-encrusted Rolex. It’s not a direct quid-pro-quo where the briber immediately benefits from a decision, but a more subtle form of corruption where the gift contributes to the cultivation of a beneficial relationship.

Once it became obvious that the crackdown was real, the luxury product market in China was hit hard. Not just because the corrupt began refusing elaborate and luxurious gifts but because officials and their families, even honest ones, became wary of ostentatious displays of wealth — displays which might attract the attention of anti-corruption investigators. The Rolexes disappeared from the wrists, the diamond cufflinks were replaced with simple buttons, and the fancy fountain pens remained in their boxes. Unable to use the luxury items they already owned, retailers suddenly found their customers were a lot less interested in buying new items.

For Ming Fung, it was just bad timing which meant this happened so soon after they acquired Omas and the prospect of launching a new luxury business fell apart. Over the next two years, Omas continued to lose money and Fengdeli’s profit guarantee was paid out almost in full. Between 2010 and 2014, revenue fell by almost half. Costs fell too, but not fast enough for the business to come close to breaking even. In 2014, it again lost €1m — the same amount of money it had lost the year before Ming Fung acquired it.

On top of the troubles inside Omas, we can also consider the troubles experienced by the parent company. In the year they acquired Omas, Ming Fung made a profit of $16m. Despite President Xi’s November announcement, in 2012 they still made a healthy profit of $9.5m in 2012. But the years which followed were not so kind: in 2013, the company made a loss of $112m and this was promptly followed by a loss of $133m the next year. These are extraordinary numbers.

Facing cash constraints and further losses, Ming Fung undertook a stock offering in early 2015 to raise additional capital and shore up the business. The chairman and CEO swapped jobs with each other soon after, followed by a review of the business and a brutal round of cuts which reduced costs by 85%. (Look around your office the next time you’re there, put together a mental list of 20 people who work in your vicinity, and imagine 17 of them get fired. That alone wouldn’t get you to 85% but it gives you an idea of just how brutal it is.)

Not surprisingly, the review of the company brought Omas back to the attention of Ming Fung’s senior management. The complete failure of their expansion strategy, the constant and unyielding losses, it all meant that providing additional capital to prop up the business was just throwing good cash after bad. At the end of September 2015, it was announced that Ming Fung (now called O-Luxe) was no longer providing Omas with financial support. Six weeks later, Omas ran out of cash and entered receivership.

Receivership

Entering receivership is basically entering a state of limbo for businesses which have run out of cash. The business is neither alive nor dead. They still have assets, just no cash with which to pay the bills. A receiver is appointed with full power to make decisions affecting the business; he or she can fire staff, close down divisions, sell assets, or keep things operating somewhat normally.

The receiver’s role is to ensure debts are repaid, determine whether a viable business exists, and figure out how to realise the maximum value from the remaining assets. If a viable business exists, the receiver may choose to close down unhealthy parts of the business and sell assets until a healthy, profitable business remains. If nothing is viable, the receiver’s role is to prepare the business for liquidation.

Given the recent history of Omas, it’s no surprise that the receiver found no reason to try and keep the business going. At the end of September, O-Luxe calculated that the net asset value of Omas was now just $1.75m, a far cry from the $10m valuation less than four years ago. They wrote off most of the $6m valuation they claimed for the Omas trademarks, leaving them worth somewhere between $750,000 and zero.

The receiver would have considered two options for the business: either a buyer could be found for the business or Omas would enter liquidation and the remaining assets would be sold to repay debt, with any residual flowing back to O-Luxe. There were rumours late last year and again in the last few weeks that a possible buyer had emerged but it does not seem to have panned out.

There was also a story about an employee buyout which got traction online. An employee buyout is where the employees buy the company from the present owner and run it themselves. It’s a pleasant idea to think that these passionate artisans will be able to take over their long-term employer and finally earn a taste of the profits they’ve helped build, but of course the reality is that Omas hasn’t made a profit for some years. At best, those employees would be buying an asset that demanded more and more of their money each year.

The other reason I found the story less than credible (or unlikely to be successful) was the small number of employees and relatively high asset value. As I mentioned above, O-Luxe calculated NAV as $1.75m at the end of September and it’s likely that would have deteriorated further as Omas continued trading through October and November. Let’s assume it fell to $1m, for no other reason than it’s a nice round number. I’m not exactly sure how many employees were left at Omas, but let’s assume it was 18 and they all wanted to participate in the buyout.

For them to even equal the amount O-Luxe would realise from liquidating the business, each employee would have to pony up $60,000. On top of that, the business would need to be recapitalised — you can’t run a business without having cash on hand — and it would have to start making a profit immediately or the employees would have to pump in more cash each year. In 2014, Omas made a loss of almost $900,000 — if it made the same loss after the buyout, each employee would have to put in another $50,000. Imagine yourself in the same situation: if your employer was going under, and even assuming you believed that it was possible to turn the business around, would you have $60,000 or more to put into it? Would you be willing to risk that much? Would you be willing to follow it up with another $50,000 after 12 months? (If your answer is yes, you should seriously consider whether you’re the best person to make your family’s investment decisions.)

The Future

Unless a buyer emerges in the next few days (and I wonder if Nicholas Gold is already on his way), Omas will soon enter liquidation. The employees are already being laid off, and soon the machinery, equipment, inventory, and buildings will be sold off. If a buyer can be found, the trademarks will also be sold; otherwise, they will revert to O-Luxe and eventually lapse. The employees should receive their entitlements, creditors will be repaid, and any leftover funds will also revert back to O-Luxe.

There is a small chance that an enterprising buyer will offer to buy up the valuable pieces of the Omas business — the inventory, the equipment, the trademarks — and may set about trying to rebuild some profitable parts of the business but I’d say that’s an extremely slim possibility. We may see a distributor or retailer buy up whatever remaining pieces of inventory they can, some unsold pens and spare nibs, and we may see someone buy up some of their equipment so they can turn out replacement parts, but I don’t see anyone jumping in to resuscitate the company.

So in fairly short order, the business will just fade into nothingness just as plenty of great brands from the past have done. Once the trademarks expire (3-5 years), the Omas name will become fair game and an opportunity for revival as we’ve seen with brands like Conklin, Conway Stewart, Esterbrook, Onoto, and Wahl-Eversharp. (Though I really, truly hope that someone buys up the name just to prevent it slipping into the hands of someone like Rob Rosenberg and having its reputation subsequently ruined. In fact, if someone wants to Kickstarter that, I’d be all for a contribution.)

Conclusion

While it’s easy to accuse O-Luxe of incompetence or mismanagement, I think that Omas has been living on borrowed time since at least 2011 and possibly since the 2007 financial crisis. O-Luxe had a decent strategy when they acquired the business and it wasn’t their fault that the bottom fell out of the market when it did. If they had tried a different strategy, maybe the outcome would have been different too, but I suspect the most realistic alternative was Hengdeli putting Omas out to pasture in 2012. O-Luxe kept them going for another three years, and lost $40m in doing so. I’m not going to kick them too hard given the loss they made on this.

There has been some extended discussions about Omas online. I’ve read a lot of it and found most of it seriously misreads the problems that the company faced and the proposed solutions would not have done much to prolong the inevitable. They were not doomed because they lacked an online store, because B&M stores keep the best nibs ‘out in the back room’, or because they occupied an ‘unprofitable niche’ where their pens were too expensive for normal users but not expensive enough to have as a status symbol. I also don’t believe introducing a range of cheaper pens would have saved them — the R&D alone would’ve blown out costs and all the additional production would have increased the losses they were taking, just to sell a line of low-margin products. (I know it’s shocking but it’s possible anonymous internet commenters sometimes have absolutely no idea what they’re talking about.)

At any rate, this has been a hard post to write. Not just because I’ve had to read a bunch of annual reports and financial statements and I enjoy accounting research about as much as I enjoy a bout of food poisoning, but because I really love Omas pens. Time and again, I’ve said that their nibs are the best in the business — writing with one is a sublime, joyful experience that never fails to put a smile on my face.

On top of that, both my Omas pens were gifts from my partner. For our anniversary last year, Lisa wanted to give me a pen but not one that I’d use for work and associate with the stresses of the office. Instead, she wanted to give me a pen that I would use simply for pleasure, something that I would enjoy using and would use for enjoyable tasks. We chose an Omas, the Art 2015 in a shade of green that she loved. It was my first Omas and a perfect choice. So much so that it led to another Omas, the Ogiva Alba, as a Christmas gift last year. I’ve really treasured both of those pens.

It’s sad to think that the brand which brought such pleasure might well be permanently gone now: that the employees will go off to work in other industries, that they will not team up to produce any designs or manufacture any new pens or nibs. 90 years of art and craftsmanship and genuine luxury — luxury in the sense of beautiful, well-made products created by true artisans — have all come to an end. I wish I’d gotten into Omas pens earlier and had more of a chance to learn and appreciate what a wonderful, special brand they had been.

Vale Omas. I was sorry to see you go but I’m grateful for all the wonderful products that came through your factory and all the wonderful work that your people were able to do. Thank you for bringing such pleasure and magic to our community.

Update: Bryant of Chatterley Luxuries has commented on Instagram saying most of the staff have been laid off but a few remain, handling repairs/warranty work for the next six months and there may be more news after that point. So perhaps there is still a chance for a revival down the track -- hopefully this comes true.