LOAN TO OWN? OR WHAT CHOICE DO WE HAVE?

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

HURON CONSULTING & AN ACCOUNTING PROBLEM

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

CONFRONTING REALITY

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

SEE YOU IN SEPTEMBER!

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,
Gail

DIP LENDERS TAKE OVER DELPHI

A few weeks ago bankruptcy judge Robert Drain derailed a government sponsored plan for Platinum Equity and GM to take over Delphi and have it emerge from bankruptcy. Delphi is a former GM subsidiary that filed for bankruptcy several years ago. It had been languishing in Chapter 11 limbo unable to put together a confirmable plan of reorganization. The government sponsored plan offered to pay the DIP lenders only 20 cents on the dollar. DIP loans are generally assumed to be money good and there are very few instances over the past 20 years where DIP loans were not paid in full.

Judge Drain ordered an auction to take place for the company. The auction was won by the DIP lenders who bid in their debt. They had $3.4 billion of loans due from Delphi. For another party to win the auction, they would have had to bid more than the face value of the lenders' loans. According to the WSJ, there will be a hearing to approve the sale on Wednesday. It may be interesting to follow since this case has had many twists and turns.

Should the DIP lenders have the sale approved, the fun will only just begin. They will immediately have to work with management to make sure they have a leadership team in place that can ensure that Delphi will be viable for the foreseeable future. These turbulent automotive times require the best leadership available in management and at the board level.

Cheers (back from Scotland), Mike

HOW ABOUT A BANKRUPTCY?

Ah, Chapter 11 bankruptcy, it came into existence in its present form (with some amendments) in 1979. At first it was used largely by retailers and then by the wave of the late 1980's broken LBO's (leveraged buyouts). By the early 1990's, Chapter 11 began to be used to obtain financing (Debtor-in-Possession financing) when financing was otherwise not available.

In 2009, Chapter 11 bankruptcy has been used in ways no one could have anticipated 30 years ago. Al Lewis has an entertaining article on how Chapter 11 is being used. In the Madoff matter, it used to find and recover funds. The Government used it to ram through sales of the assets of Chrysler and General Motors (whatever happened to a plan of reorganization?). Sam Zell, aka "The Grave Dancer", may use it to sell the Chicago Cubs. In the Phoenix Coyotes filing, creditors are using Chapter 11 to get a look at Wayne Gretzky's tax returns.

It has been a crazy year for Chapter 11's. Look for it to continue with all the crazy precedents that have been set for better or worse (mostly worse).

Cheers from Scotland,

Mike

CIT SHOULD HAVE MADE CAR LOANS

CIT is a large financial institution that lends to small and middle market businesses. By today's definition however, CIT's $75 billion of assets makes it not a large financial institution. And apparently way too small to be too big to fail. And finally, CIT must not have a big portfolio of car loans like GMAC. So, the Government has left it to CIT's existing creditors to assist in giving CIT more time to right the ship. Gee, this approach is so last century.

I guess the Government has made its point because the press is pointing to a multi-billion dollar loan being done with CIT's major bondholders to keep it out of bankruptcy. The next couple of days should provide more details as to how such a deal, if completed, will allow CIT to successfully restructure.

According to this article in last week's WSJ, the company has some work to do. CIT made some management changes around 2001 that resulting in Vice-Chairman Joe Pollicino and other experience credit people leaving the firm. The new management ultimately led CIT down the subprime mortgage and student loan roads. And we all know where those roads led.

We should expect that management changes amongst strategy changes to be coming down another road very soon. Maybe the bondholders will call Joe....well, maybe not.

A number of years ago I used to attend a CIT golf outing every year at Fenway Golf Club. Fenway is a great track originally designed by 1920's noted architect, A. W. Tillinghast and recently worked on by a well respected architect, Gil Hanse. But I digress. One year one of the people checking in golfers for the outing asked if I was related to Joe Pollicino the Vice-Chairman. I, of course, replied, "Yes, he is my uncle." For a few years I received the royal treatment at the outings. One year however, Joe came up to me and said I had to stop saying he was my uncle. To which I replied, "Ok unc."

NY TIMES ON DIMON

The NY Times followed up my post from last week on Jamie Dimon, CEO of JP Morgan, with an article in the Sunday edition. Nice of them to pull their weight on this item.

Cheers from Scotland,

Mike

BUT, THEY SHOULD BE ABLE TO .....

I was speaking with a young CEO a few weeks ago. He was complaining that an important member of his team should be able to perform certain tasks, but the member couldn't perform those tasks. He went on to complain that he didn't have the time to do the task.

I made a couple of observations. First, you can't keep acting as if the member can do what they should be able to do. They can't do it. It is like a football coach who has a quarterback who cannot roll to his left and throw an accurate pass. The coach can keep calling the rollout to the left because the quarterback should be able to throw an accurate pass or he can call rollouts to the right where the quarterback can throw an accurate pass. So, don't expect someone to be able to do what they should be able to do if they can't do it. Plan accordingly.

Second, managers get more frustrated with a team member when they are pressed for time (isn't that always?) or when they can't do the task either. The managers say "they should be able to do their job!" Leaders however, acknowledge the truth of the situation. Leaders evaluate how to support the person can't do what they should be able to do. Sometimes more training and education is required. Sometimes additional support is required. And sometimes, the task needs to be done by someone else.

When I had my own firm, we had a former Big 8 accounting firm partner working with us. He had great instincts (probably still does) and did great work. However, he could not commit his work to writing. He literally couldn't get a report out. After speaking with him a few times, it became clear to me that he was not able to put it on paper. Instead of complaining about it, I found a young staff person who was progressing rapidly. The staff person wrote great reports. So I 'velcroed' the staff person to the senior person and he became the report writer. The staff person benefitted greatly from the constant exposure to the senior person.

In closing, work with "what is" not "what should be".

Cheers, Mike

WELCH: "NO SUCH THING AS WORK-LIFE BALANCE

Once again, Jack Welch proves to be an expert at the blunt sound bite. He was a speaker at the Society for Human Resource Management and told them that women climbing the corporate ladder need to choose between taking time off to raise their children and reaching the corner office.

Read the article and of course there are those who agree and disagree with him. Unfortunately, there is not a transcript of his exact words. Some people interviewed agreed with him and others said that companies need to change to accommodate a diverse workforce.

Welch is quoted in the article as saying their are work-life choices and they have consequences. This is a true statement and men and women both make these choices all day long, every day. We all deal with these challenges differently and some do a better job than others. I have worked with men that worked crazy hours but whenever they were not out of town, they went home to have dinner and tuck the kids into bed, then they worked late into the night to make up the time. I have worked with others who came in after taking the kids to school. I do not have children, so I would work till I dropped during the week but look to get the weekends off. We all do it differently and we may not do it great.

It is important though to remember why we are doing "it" at all. Whatever your career goals, which may or may not be the corner office, remember that we work to live not live to work. Therefore, we all need to find the balance that works for us. I remember reading an interview that Jack Welch gave when he first retired. In the interview, he said that he was completely unprepared to stop working and it was very hard on him. Sounds like he had not found balance.

But let's get back to women and specifically having children. For the most part, I think companies and women have figured this all out and women are very successful even after taking maternity leaves. However, time off does have a price. In my experience, I have seen women achieve great positions but slower then they would have without extended periods of time off.

But, I do think the corner office is different. I believe that what Jack Welch said is often true when boards are selecting CEO candidates. I think women should be proactively educating boards and CEO search firms that select CEO candidates and look at career timelines. Timelines are meaningless. Results are what matters.

What are your thoughts and experinces? How do you achieve work-life balance?
Until Next Time,
Gail

LEADERSHIP: GETTING THINGS DONE BY PEOPLE

Leadership is about getting things done by people. Therefore, the "people issues" are a key element of leadership and why corporate cultures really matter. Mike posted on July 14 I Should Have Nurtured a Unified Culture which fits in nicely with this post.

I read an article in the WSJ How Buck Knives Decided to Move HQ. Interesting and quick read that highlights how easy it is to take the people and the culture for granted particularly if someone else built the business. Many acquisitions and reorganizations go wrong because there was not enough thought and effort put into the people issues and the culture they operate within.

But cultures also need to be maintained to stay healthy and vibrant. Hiring decisions, training programs, promotions, raises and internal processes all need to fit the culture you want to build and maintain in your organization.

Until Next Time,

Gail

JAMIE DIMON, A LEADER TO BANK ON

According to the WSJ, Jamie Dimon, CEO of JPMorgan, is chomping at the bit to take the leadership position for the US banking industry. Last fall, Jamie agreed (like Paulson gave him a choice) for JPM to accept TARP funds for the good of the country. There was never any real evidence that JPM needed any support. Jamie did the right thing. He was none too happy though, when the new Administration showed up and put strings on the TARP funds that JPM already received. He was also none too pleased that JPM was being painted with the same brush as other banking institutions that really needed the TARP funds. Then, he had to fight to pay the funds back.

Well, now that JPM has paid back the TARP funds, get ready for Jamie to be a vocal leader on what is right for the banking industry! There is no other large bank that is in the position for its leader to take a leadership position. They all have to worry about a government/regulator backlash.

Real leaders do the right thing. They also have to sometimes tell the world what the right thing is! Sign up on google reader and other feeds to follow what Jamie has to say on banking and the economy. I guarantee that it will be thought provoking and educational to say the least.

There is a book on Jamie Dimon. I haven't read it but if you want to know more, pick it up.

Cheers, Mike

I SHOULD HAVE NUTURED A UNIFIED CULTURE

Napoleon Barrigan, the owner of Dial-A-Matress watched his company file for chapter 11. According to this WSJ article he largely blamed bringing in a cadre of professional managers who brought with them cultures that were different than the one that existed. The existing culture was marked by a collaborative inclusive style that included everyone in making the business better. The new management additions had an exclusive, we know better style that wound up accelerating the demise of the company.

Napoleon admits that there were other errors. The company opened retail outlets when its profits were mainly derived from phone and internet sales. Some of the retail outlets were in poor locations which were selected because of low rents. Further, the company expanded too quickly and couldn't profitably manage the growth.

The importance of a company's culture is often ignored by the heads of businesses. For them, culture doesn't count. Maybe it is because it can't be put on a spread sheet. In the end, these managers feel the pain of their company's underperformance.

This reminds me of a story. I once was hired by a private equity shop owned by a former Presidential economic adivsor. He had purchased two companies in the paper industry with the plan to merge the two companies. His theory was "one plus one would equal three". He had leveraged the combined companies pretty highly since he believed the results together would be much better.

The results were not better. In fact, it turned out the "one plus one equaled one"!! We went out to visit the company and within two days found the main reason for the underperformance. The two companies had two very different cultures and there was friction everywhere. Virtually every aspect of the business was underperforming.

When I disclosed this to the private equity owner, he didn't believe me. He said it couldn't be a culture issue and things were not as bad as I said. In fact, he said I was exaggerating the situation to make more work for us. I laughed and told him, more work was the last thing we needed. We left for a week. He called me back and said, it was as bad as I said it was. It took two years to straighten things out.

Don't ever ignore the culture.

Cheers, Mike

LEADING VS. MANAGING

The WSJ has a good short series on Leadership. It has articles and short videos. Today we are going to spend a couple of minutes on their short article on Leading vs Managing. All leaders must manage in addition to leading. But certainly, what differentiates a manager from a leader is that they manage, but they don't lead. Many people think managers are leaders; this is not true.

Take a look a some of the items in the article.

1. A manager's job is to plan, organize and execute. A leader's job is inspire and motivate.
2. The manager focuses on systems and structure. The leader focuses on people.
3. The manager requires control, the leader inspires trust.
4. The manager maintains, the leader develops.
5. The manager always has the eyes on the bottom line, the leader has the eyes on the horizon.

All companies needs great manager and great leaders. Look at the list and see where you fit. You may pick up on that leaders focus on people, doing the right thing and the direction of the company. How much do you focus on your people? Or are you totally focused on getting the job done? They are not mutually exclusive.

Cheers, Mike

UBS vs. THE IRS AND THE SWISS GOVT

In February, UBS admitted that it had sent Swiss bankers to the US to assist high net worth individuals to set up secret Swiss accounts to evade US income taxes. UBS paid a fine of over $700 million and turned over 250 names.

Now the IRS wants UBS to disclose the other 50,000 plus names. Enter stage left, the Swiss government which has told UBS it is against Swiss secrecy laws to disclose the names. Check out this short video of how UBS is between a rock and a hard place. You can get some details and color from this Reuters article.

So, the Swiss government make prevent UBS from disclosing the names and the US government could actually prevent UBS from doing business in the US. How did UBS get into this situation? UBS put making money as a higher priority than doing the right thing. Leaders always put doing the right thing first. When you put money ahead of doing the right thing, very bad results occur and sometimes these results are devastating. See Arthur Andersen.

Cheers, Mike

BRYAN MARSAL ON LEHMAN BROTHERS, ETC.

I played golf yesterday out on Long Island with one of the Alvarez & Marsal guys. A&M is one of the two leading international crisis management firms which has now expanded into other areas. My guest asked if I had seen Bryan Marsal's spot on CNBC's Squawk Box on Monday. I told him I had not seen it and he said that I should.

So, when I returned home, I immediately went online to retrieve the video clip. (OK, I didn't exactly drop everything to run to the computer.) But when I finally got to view the clip, I found that Bryan did an excellent job explaining the status of the Lehman situation and answering questions some of which addressed much broader issues.

He was asked if Lehman was the most complicated assignment he has ever worked. He immediately answered, "No, Lehman is a complex liquidation. But bringing a failing company back to life is much more difficult and complicated."

He was asked about the various government entities that he has to deal with on a frequent basis. Here he used the "leadership" word. He strongly commented that the various government agencies lack leadership. He said the various entities, the SEC, the Federal Reserve, FDIC, et al are poorly coordinated, have different rules, have different agendas, have turf issues and communicate unclearly.

He went on to say that if the government agencies were run as a business, there would be one person, a leader that would sit on top of all the agencies like the CEO of a business. We can all imagine that the lack of a leader of these agencies is like the lack of a CEO. Different parts of the business doing whatever they want to do. So imagine each agency doing what it wants to do without regard to what the other agencies are doing. Just lovely.

Listen the video, it is worth the time.

Cheers, Mike

FAIR AND UNBIASED RECRUITING AND PROMOTIONS

Every organization is striving to hire, promote and retain the best talent. You need to make sure that you achieve that goal in a fair and unbiased manner. There is an article in today's Wall Street Journal about a Supreme Court ruling regarding a landmark discrimination ruling on a lawsuit originating in the fire department in New Haven, Conn.


The author asserts that the job-test ruling will inspire some companies to consider broader use of exams but that others believe there is still too much uncertainty. The issue in this lawsuit was that when you use job testing you must make sure that the test itself is not biased. In this case the test was certified as not biased yet when only white firefighters passed the test the city concluded it must be biased and wanted to administer a test. The firefighters that passed the test sued and after many years the ruling was issued this week. The ruling was that the tests can not be biased or discriminate but if the test is not biased you can not tinker with the results to favor any one group over another group.


Promotion tests are much more common in the public-sector. However, many private- sector companies use a variety of tests and are now considering using promotion tests.


I feel strongly that leaders in the private-sector need to be careful using any test or metric exclusively to make decisions. Leadership judgement is an important element. If judgement were not necessary, excel spreadsheets could run businesses. Hmmm, maybe they would do a better job. Metrics and tests can be critical tools and often help to eliminate un-intentional bias. Leaders are human and therefore fallible. When we like or dislike someone, even when we are not intending to have a bias, we can give more slack to the employee we relate with better. Tests and metrics can help balance our own biases.


Overall, this case was very interesting and thought provoking. You may also like to read another article in the Wall Street Journal that provides more of the background.

Until Next Time,
Gail

IF WE WANT FUTURE WOMEN LEADERS, LET'S TEACH OUR DAUGHTERS MATH

There is an interesting article in Forbes Women How to Raise a Rich Daughter. The article covers the fact that women hold 43% of the investable wealth in America, only 10% of Asset Managers are women. There are many other statistics of how quickly females drop out of interest in math at the various education levels. Even if a woman does not become an asset manager, she will need math and some accounting knowledge to succeed in running a business.

So let's get our daughters, nieces, mentees and proteges focused on math! Maybe there is a business opportunity for someone here. The article highlights that most computer games with math as a basis are the "shoot em up" variety that appeals more to boys than girls. Maybe one of our readers will create a computer game based in math that appeals to girls.

Until Next Time,
Gail

TIME IS MONEY, BUT CASH BUYS TIME

I was paging through the Financial Times at breakfast this morning in London. There is an article about all the actions that the current CEO, Fritz Henderson, is taking at GM. Some are saying how much more action-oriented Fritz is than Rick Wagonner, the former CEO. Al Koch of Alix Partners, the chief restructuring officer of GM, says the changes that GM has made in the past 100 days usually takes a year.

That may be true, but it is the lack of cash that drives quicker and deeper actions in a financially troubled companies. For years GM, and Chrysler for that matter, avoided taking the really hard actions because there was enough cash to delay the painful actions. Why the delay? Hope springs eternal at troubled companies. Top management hopes (sometimes believes) that next quarter, next season, next product introduction will provide the underpinnings of a substantial turnaround. And wouldn't it be terrible to make the hard, deep cuts now and then have the business turnaround.

I have seen this happen over and over again for the past 25 years. Unfortunately, many CEO's take the really hard actions only when the company is running out of cash. Why? Because only then does the CEO accept that time is running out. At that point, there is no choice. It is either the hard actions or death of the company.

My co-author worked at a company once that needed to take hard actions. She said 'the CEO should be doing this and that.' I told her she was right but that it would probably not happen until it was too late. I told her that the company had too much cash and financing available to it. As a result, the CEO had the luxury of time for the business to ride an industry turnaround when it showed up. I further pointed out that when the cash finally ran out, it would be too late to implement a turnaround. Three years after I told her that, the company filed for bankruptcy and had no choice but to sell itself in pieces.

So, I am glad to hear Fritz is action-oriented. But is it him? Or is it because the GM is out of cash and management has no choice?

Cheers, Mike

LEADERS STEER CLEAR OF THE ERRORS OF GROWTH

In the troubled company world, we often speak of the errors of growth. We have seen them all around and usually they are more obvious to the casual observer than the analyst. For example, look at Starbucks. Who hadn't remarked that there was a Starbucks seemingly on every corner. While that was an overstatement, in some cities it seemed like fact. It was obvious that each new Starbucks at some point, was taking market share from an existing Starbucks.

Since I am in England today, it seems appropriate to comment on an error of growth in London. It has occurred to none other than Gordon Ramsey. By his own admission, he grew too much too quickly. He has closed restaurants, let staff go, borrowed more money (4 million pounds this year alone), put some of his own money into the company, put some of his father-in-law's money into the company, and he even had to sell his Ferrari.

Leaders grow their companies in a measured secure manner. They make sure their capital structure provides them with the ability to withstand downturns and competitive pressures. They don't stretch themselves to the max.

Leaders take care of the downside. They know the upside takes care of itself.

Cheers, Mike