This is a gem!” exclaimed the MD of a renowned European technology firm as he examined the sample of a perfectly formed piece of plastic lens shown to him by the chief technology officer of a Singaporean plastic injection company. “Why would your parent company want to sell the company away now that it has finally built up all these technological capabilities?” The CTO could only shrug and explain that the parent company was facing cash flow problems and had little choice but to sell its subsidiary to raise cash to pay its current bank loans.
Like the sample of the cut plastic, many “gems” can be unearthed across the world, especially in
Mining for Rubies in
A decade of corporate restructuring, economic integration and international expansion in
Powered by exports,
The restructuring of distressed companies as an alternative to a breakup has a long history in the
One such example is ThyssenKrupp AG. As part of its continuous portfolio rationalization process, it decided to sell off a subsidiary: ThyssenKrupp PrÃ¤zisionsschmiede. The German-based manufacturer of high-tech auto com ponents generated revenues of ï‚€ï€ 290 million in fiscal year 2006-2007. In January 2008, Sona Okegawa Precision Forgings Limited, the India-based manufacturer of forgings, announced plans to acquire the Germany-based manufacturer of high-tech plants and components for an undisclosed sum. By acquiring ThyssenKrupp, Sona Okegawa achieved immediate capacity expansion and international exposure, leveraging on ThyssenKrupp’s network into
Mining for Emeralds in
Asian firms, on the other hand, are keen to seek investment and technology partners to upgrade and expand abroad. In
Getting Fit to Mine
Of course, not all companies are fit to mine. A thorough fitness check can gauge whether going out into the world to mine will be beneficial to the overall health of the organization. The current financial crisis has reminded many companies of the concept of restructuring in both good and bad times.
Restructuring of companies can take the forms of financial and operational restructuring. Financial restructuring entails refinancing at each level of the company’s capital structure, which includes securing debt/loan financing, forming strategic partnerships, pursuing M&As and, in cases of financial distress, reorganization. Companies not fit for mining would do well to focus on securing their loans.
Easy access to liquidity in recent years encouraged greater flexibility in restructuring, and innovative debt instruments subsequently brought new lenders and investors to the table. Unfortunately, the good times are over and instruments like equity bridges, covenant-lite loans and payment-in-kind notes are things of the past. With credit markets in turmoil, many companies are finding it more challenging to raise the money they need to fuel their business.
Fortunately, bank executives emphasize that quality borrowers-companies with good management and a sound business-will still be able to snag good deals. If your business is sound now and was sound before the credit crisis, and the fundamentals have not changed, then there is no reason for the bank to take a different approach (unless something has happened at the bank). Thus, if your company has yet to establish a relationship with a bank, now is the opportune time to do so, as lenders will continue to have an appetite for the right businesses.
Operational restructuring involves increasing the economic viability of the company’s underlying business model. Examples of operational restructuring include the sale of divisions or divestitures of products lines, or cost cutting measures like the closing down of non-performing facilities. For companies in financial distress, both financial and operational restructuring would need to be conducted quickly and efficiently to return the company to healthy fitness levels.
For companies with capital or the ability to raise capital, a window of opportunity to mine gems from around the world has opened. Warren Buffett, Wilbur Ross and Ron Perelman are plunging into the mine shafts to scoop up companies hit by the financial turmoil after years of being shoved to the side by high valuations and fierce competition from private equity. These savvy “value” investors believe the financial and capital market crisis now offers a great opportunity to dig out the gems.
In fact, Warren Buffett has already invested approximately $6 billion in a wave of deals since the crisis began. After years of sitting on the sidelines, companies with strong financials will find that there is no better time than now to start mining.
Jake Cohen is affiliate professor of accounting & control and business law at INSEAD. Joerg Nuernberg and Anne Young are partner and senior consultant, respectively, at the international consulting firm Droege & Comp.