Posted on November 13, 2008
By now we know the story all too well. Sixteen strangers debark onto a jungle island and are told they must work together to survive. While they pretend they’re on the same team, from the start they scheme to position themselves to outlast the other contestants, because at the end of the day they know there will only be one SURVIVOR.
Every business leader in America (and the World for that matter) is anxious to understand the impact of the financial crisis on their own business and personal prospects. How bad is it going to be? Does the crash present new opportunities? What should I do now? And yes, “What must I do to survive?”
Based on conversations with our clients and with financial and strategic investors, many are choosing to “hunker down” and ride out the storm. For some firms this may be an appropriate course. Yet to make such a decision without a realistic evaluation of your firm’s financial survivability in light of the new circumstances would be shortsighted at best. Unless you have capital reserves sufficient to weather a very protracted (perhaps eighteen months or more) and severe downturn, your business could be at grave risk. And if you depend on leverage, this calculation must also take into account the potential impact of reduced loan availability and dramatically higher loan pricing, which may well come sooner than you expect.
What We Know
The U. S. economy is in the midst of what will likely be the worst recession in the postwar era. It appears that the decline is rapidly spreading around the world and that we may well experience a serious global recession that will dramatically affect even the (until now) rapidly developing economies of Asia and Latin America as well as the developed world. The effects of … read the rest
Tags: Tags: Asset Based Lenders, Asset Based Loans, Bank Lending, Bank Loans, Bankruptcy, Banks, Business Acquisition, Business Financing, Business Financing, Business Sale, Business Survival, Business Turnarounds, Chapter XI, Junior Capital, Mergers, Mezzanine Debt
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Posted on November 12, 2008
Picture the scene. It’s late 1992. The U.S. is still recovering from a severe recession and financial crisis. But there’s trouble on Main Street. One of the nation’s most venerable industries is in shambles. Upstarts from Silicon Valley created a new technology that is rapidly overwhelming the mainframe computer business, one of the great success stories of postwar America. And now low cost competitors from Asia are rapidly destroying the competitiveness of the U. S. chip manufacturers.
As a new administration is preparing to bring historical change to Washington, hordes of blue suited, white shirted IBMers descend on Washington to demand a bailout for their critically important industry. Joining the chorus are congressional leaders from New York State, fearful that high paying jobs are about to be lost. The nation is galvanized as Congress passes and the new President signs the Computer Industry Relief Act of 1993.
Well of course we know that this never happened. Instead, Lou Gerstner and his team transformed IBM from a hardware manufacturer to one of the world’s leading IT services providers. Intel remade the chip industry, replacing dumb chips with very smart ones, creating an explosive personal computing industry. Sure some of the old mainframe and mini-computer companies are no longer around and those that are look nothing like the ones their previous selves. But the industry that emerged is far larger, more profitable and provides many more jobs that the mainframe manufacturers ever dreamed of.
The federal government is going to provide some form of support for the auto industry. There are too many jobs at stake and frankly the patient (the U. S. Economy) is too weak to risk any more systemic shocks. In today’s New York Times, Thomas Friedman has written a great tell-it-like-it-is article outlining a realistic plan for a federally funded bailout that … read the rest
Tags: Tags: Bankruptcy
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Posted on November 10, 2008
AIG announced today a deal with the Federal Reserve that will have the effect of increasing the Fed’s bailout financing to AIG from $85 Billion to in excess of $167 Billion (and most likely counting).Â Any seasoned distressed company investor knows that the first new money put into any failing company is likely to be lost unless the investor is prepared to follow the initial investment with a lot more (sometimes referred to as “good money after bad”).Â More than one wag has described this phenomenon as “the second mouse gets the cheese”.
The other big economic news of the day revolved around the proposed bailout of General Motors.Â Clearly something is likely to happen here with three million jobs at stake and a lot of political power in play with the United Auto Workers.Â Given the inevitable, wouldn’t it make more sense if the money comes in as part of a pre-packaged Chaper 11 which cleans up the company’s balance sheet before the money comes in?
I’ve never seen a successful turnaround that keeps the old, failed management on board to steer the sinking ship.Â Perhaps it would make more sense to put together an ownership group that includes some Japanese auto manufacturing skill as well as some of the best businessÂ minds in America.Â Toyota, Honda, et. al. clearly know something about running a successful auto plant and they are not afraid of investing in the United States.Â And Steve Jobs seems pretty successful at creating a consumer products company.Â Let’s harness the best we’ve got to create real change in this vital industry, not subsidize the failures of the past.