iRobot is going bankrupt - and it was inevitable.
I wrote before about this phenomenon - how market pioneers end up broke, over time, or at least lose their first-to-market advantage, often rather quickly. DeHavilland was first to market with a jet airliner, but within a few years was eclipsed by Boeing and Douglas. The second-to-market learns from the expensive lessons of the first.
It is a pretty consistent pattern, too. Early automakers dominated the market, but largely disappeared within a decade or two. Digital Research dominated the market for PC operating systems, only to be rapidly eclipsed by newcomer Microsoft. And that example illustrates how hubris can sometimes lead to downfall. After all, when you basically invented a market segment, you might think you are invulnerable. But instead, all you did was blaze the trail, taking all the risks and making the majority of effort, only to make things easier for those who follow.
So, it is not surprising that iRobot went bust. In a strange-but-not-so-strange coincidence, it will end up being taken over by its main rival, much as Segway ended up being absorbed by its Chinese knock-off competitor. First to market is last in the marketplace.
The mathematics of Chapter 11 bankruptcy are simple. Shareholders are wiped out - their share price goes to zero and they lose everything. Debtors become the new shareholders of the company, post-bankruptcy and life goes on. In the case of iRobot, the debtor was one of their biggest competitors (making knock-off Roombas for cheap) and also their biggest supplier. They bought up iRobot's debts from the Carlyle group (no doubt at a discount) and ended up owning the company.
Of course, what they own is mostly intellectual property - the Trademarks and a few Patents. They already owned the manufacturing facilities. No doubt the pension liabilities for the former employees will be stripped-off or severely reduced during bankruptcy proceedings.
Of course, political hacks on both the right and left are using this to advance their own nefarious agendas. Leftists argue this is another example of greedy CEOs "putting profits above people" while the Rightists argue this is another example of how globalism and free-trade cause an American innovator to go broke. Neither are correct, of course - at least not in whole.
Like most bankruptcies, the main issue is corporate debt. Often perfectly good companies making a reasonable profit are swamped by debt-service. If debt-free, they could survive, but buried in a sea of debt, they cannot survive. And often, these debts are acquired for frivolous purposes, such as stock buy-backs, which used to be illegal and for good reason. Over the years, iRobot engaged in a number of stock buy-backs as well. One wonders if paying down debt would be a better option - or was the downfall inevitable and insiders decided to cash-out instead?
How iRobot ended up where it is today is not a simple one-word answer, but a combination of factors. Being first-to-market has initial advantages, but they are short-lived. You can try to preserve market share through intellectual property enforcement, but that is time-consuming and expensive - and often ineffectual in foreign markets.
In the case of both iRobot and Segway, the companies ended up being owned by their competitors and/or principal suppliers. And this is not unusual. I recounted before how the very big sneaker company had to police its IP rights overseas as knock-offs of their sneakers were being sold in foreign markets. And who was making these knock-offs? Their very own overseas suppliers, who just kept the assembly line running, once the initial order from the sneaker company was satisfied. Makes you wonder - are they really "knock-offs" if they are made in the same factory as the originals, using the same tooling?
Could have this been avoided? Perhaps not. Greater forces are at work here than the decisions of a CEO. Moving production overseas is a given these days, as the price of US labor is prohibitive. Patents expire over time (as their initial Patents apparently did) allowing others to enter the market at a lower price. Taking on debt maybe was the nail in the coffin
Would tariffs have helped? I think not. For starters, since they outsourced production to Asia, tariffs ended up being a factor leading to bankruptcy, as their supply chain was disrupted. In the tariff fantasy world, such prohibitive tariffs would have incentivized iRobot to move production to the US and also acted as a barrier-to-trade for their foreign competitors. But as we have seen in the auto industry, the net effect has been that foreign competitors simply open up shop here in the US - in low-wage non-union States, and thus have huge economic advantages over the US legacy companies.
This left iRobot with few options. They could continue to innovate, hoping that proprietary technology would help them maintain market share - and allow them to continue to charge premium prices. This seems to be the Apple strategy - selling technology as designer goods. But since few people carry their Roombas on their person, it is doubtful this would work in that market segment. Rather, the vast majority of users would gravitate toward cheaper tech where price point is the key and margins are slim.
And I suspect those in the "C-suite" knew this was inevitable and thus pumped up the stock price with buy-backs and paid themselves handsomely with stock options and salaries. The founders no doubt make fabulous amounts of money as well. Who got hurt? The small investor who thought this was "the next big thing!" and assumed that once a company hits a home run, that's all they will ever do. Each of us, no doubt, took a small hit in our 401(k)s as our mutual funds likely had some exposure at some time during our tenure.
But that's just it - it was a small risk and small loss for a lot of people - too small to complain about. On the other side, a few people made a lot of money. As I noted before, if you can scam a dollar from every American in America, you'd have over $300 million dollars - and your victims would likely never notice the missing buck. Now make that $100 per citizen or even $1000 and the effect is largely the same.
Note that the P/E ratio, over time, shows that the share price was over-valued for much of its history. P/E ratios over 20 are suspect, but "tech" entrepreneurs remind us that economic laws don't apply to them - until they do. Note that the company took on long-term debt at the same time as profits nosedived - circa 2022. Perhaps failure was inevitable.
