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Why RadioShack’s bankruptcy ended in an auction

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A bankruptcy auction began for RadioShack Monday. One bidder is Standard General, a hedge fund that is also a major RadioShack shareholder and creditor. It wants to keep approximately half RadioShack’s stores open through a deal with Sprint. But other bidders are expected to be liquidators, looking to simply sell off all RadioShack’s assets. 

The bankruptcy auction is a different approach than the restructuring and relaunching that characterized, for example, American Airlines’ bankruptcy. But Peter Gilhuly, co-chair of the insolvency practice at Latham and Watkins, says it’s actually more common, especially for retailers. 

“Auctions are wonderful mechanisms for determining a price and allocating a resource,” says Bob Hansen, professor of business administration at the Tuck School of Business at Dartmouth.

But bankruptcy auctions legally can optimize only that price, looking for the “highest and best offer” to pay back creditors — even though the different plans will have vastly different outcomes for the business. Standard General says its plan will save 9,000 jobs.

“That’s what makes this news,” says Michael Pachter, analyst at Wedbush Securities. “We just don’t know. And people’s jobs are in the balance.”

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