Tuesday, August 11, 2009


There is an A1 WSJ article this morning, Distressed Takeovers Soar. The main points of the article are that M&A deals are largely occurring in bankruptcy court these days and that many investors are buying the debt to take over financially troubled companies.

I agree that M&A bankers are now spending most of their time on bankrupt M&A deals. This is not because it is a novel way to do a transaction or because it is efficient. No one would ever accuse a bankruptcy M&A process of being efficient. Expensive yes, efficient no. It is simply because in these economic times, corporations are playing it close to the vest and not on acquisition sprees. It is sometimes easier to let a competitor go out of business than to aquire the competitor.

The other main point is that investors are using debt to acquire bankrupt companies. This is the so-called loan to own approach. There are several examples of this technique and the article implies this is now happening everywhere. Au contraire!

Most of these so-called 'loan to own' situations are really as follows. Banks, hedge funds and others make loans to less than stellar companies. The lenders believe they have priced the deal and collateralized it to protect their reasonable downside. The company then underperforms and the debt starts trading down. Some of the banks and mutual funds sell their loans to hedge funds and other distressed investors. These investments are still made with the thought of getting a large enough return to justify the purchase. The investment thesis is not generally, 'hey, let's buy more of the debt at a discount and then we can bid our debt and buy the company'.

The way it often works is that the funds now have one or two rounds of debts purchases at a discount and then the company underperforms again! Now the investors realize that a sale of the company is not imminent at a sufficient price (see Delphi). The next great thought? Hey let's own the company! We can buy it with out debt. Just great, now they are bidding in their debt to own a company which the buyers are not set up to own.

Loan to own works much better when a buyer decides to buy an underperforming company whose debt is trading at a discount. The buyer starts buying the debt at a price under which it will bid for the company. This effectively lowers the buyer's price and protects the buyer against losing the purchase in a bankruptcy. If the buyer is outbid by another buyer, then by definition it will have made a profit on its efforts.

Loan to own, not as a black and white surgical process as you might be led to believe.

Cheers, Mike


What happened to Huron Consulting? Zerohedge reported, amongst others, that Huron's CEO and CFO had resigned due to an accounting scandal. Another article set forth some more info.

Apparently someone at Huron, it is not clear who, became aware that the accounting for one of the companies acquired by Huron a few years ago was not correct. Basically, Huron acquired a company and the selling shareholders decided to give some of the proceeds to non-selling employees.

Huron booked the acquisition as if all of the price paid to the selling shareholders was for the equity and therefore largely set up as goodwill on Huron's balance sheet. However, if some of the sales price actually went to non-shareholder employees, then GAAP requires that the portion paid to non-shareholder employees be expensed as compensation. The proper treatment increases expenses and reduces net income. Further, upon review by an outside firm, there were three other acquisitions that were not accounted for properly.

Huron has stated that its prior three years of financial statements have to be restated for a pretty material reduction in earnings. The NY Times has an interesting Q&A on the Huron situation. What is doesn't ask or answer who knew what, when? I suspect that since three very senior management members resigned, someone may have knew something previously. Finally, The Chicago Tribune has a piece on the hometown company.

It is always unfortunate when something like this happens. It is unfortunate for the employees, especially the support staffs, who are dedicated to the firm. Hopefully Huron will be able to survive this.

Cheers, Mike

Monday, August 10, 2009


Recently in Forbes Magazine, there was a series of interviews with several CEO's on leadership. One of the items was Confront Reality covered by Ingersoll Rand CEO Herbert Henkel. He says "always question whether the 'halo effect' of a business or business situation is blinding you to what lies on the horizon."

His point is that in the past year some business leaders ignored or wished away the negative signs of a slowdown in their businesses. Others quickly started to put their contingency plans into effect just in case the downturn was significant.

There are two points that Gail and I stress in our sessions. The first is "Confront the Brutal Facts" on page 67 of our book. Essentially, leaders must accept the facts no matter whether they are acceptable or desirable or not. It is what it is. Pretending the facts are not valid or wishing them away is not acceptable behavior for a leader.

The second point is to protect the downside. Many business people get themselves into trouble by focusing to heavily on the upside and spending much less time on the potential downside. It should be almost the opposite. Leaders protect the downside first and then look to the upside. Often times if one protects the downside, the upside almost takes care of itself.

Cheers, Mike

Monday, August 3, 2009


Hello everyone. I hope you are all having a great summer. Mine has been so good that I have not been keeping up on the blog. So, I have concluded that I should quote great old song line....See you in September! When I am back in September, I plan to write a series of articles about women running for public office. Enjoy the summer!
Until Next Time,