Amidst a global corporate environment that has produced several high profile bankruptcies over the last few months (Enron, Kmart and Global Crossing just to name a few of the biggies), HBS students flocked to the HBS Turnaround Symposium last Tuesday, March 13. The Symposium, an annual event organized as a joint venture between the Entrepreneurship Club and the VCPI Club, boasted 5 panel discussions ranging from the “Anatomy of A Deal” to “Turnarounds in Telecom” discussing distressed opportunities in the Telecom sector and the factors that have led to so many bankruptcies in that sector.
One of the highlights of the Symposium was the panel discussion entitled “International Turnarounds” which focused on the markets of Asia, Russia, Western Europe and Israel. Building on their experience as principal investors, 3 panelists from different markets shared their experience with an attentive crowd at Spangler Auditorium for a full hour.
Alexander Pham (NH), a member of the Symposium’s Organizing Executive Committee and the organizer of the International Panel commented, “We were very pleased to welcome for the first time a international perspective on turnarounds. Panelists emphasized that international turnarounds differed from U.S. turnarounds: financial markets are less developed, and the institutional and legal context is far less favorable to restructuring. Therefore, the keys to successful turnarounds rely less on financial engineering and more on effective operational leadership.”
Meir Arnon, Managing Director of the Focus Capital Group, gave an overview of the Israeli market which, at an average of 100 deals per year and an average size of $50million per deal, may seem small by U.S. standards, yet is surprisingly active if compared to other neighboring countries in the Middle East. Meir explained that the essence of the turnaround business lies in the fact that “different people see things differently” therefore capturing value from distressed assets that others might consider a lost cause.
The panelists, when asked by HBS Professor of Marketing Paul Marshall who acted as the moderator of the panel about some of the differences they perceived between the U.S. turnaround market and their respective markets had a variety of different perspectives. Among the highlights:
o Sebastian Bretschneider from the consultancy firm Roland Berger reiterated that financial institutions are the main drivers behind most turnaround situations in Europe (as opposed to more specialized or “niche” firms in the U.S.) and that the majority of the deals are operational in nature. In contrast, many of the U.S. deals tend to be financial deals whereby a major change of the capital structure and restructuring of the balance sheets of the distressed companies are the main focus of the turnaround deal.
o Domenic Aversa, Managing Director of the Parkland Group, discussed his experience in Russia and China where bankruptcy laws are still in their infancy. Russia drew most of its laws from the U.S. and Europe yet the applications of the laws has drawn a lot of criticism from foreign investors given the high level of perceived corruption among judges. Aversa pointed to the Topo Bank transaction where the presiding judge allocated the deal to local bidders and disqualified many of the foreign bidders even if they bid higher than the local bidders. Big players like Bank of America and Bankers Trust, for example, were unable to bid successfully given the lack of commitment by the law enforcement authorities and manipulation by insiders.
o Arnon described the bankruptcy law in Israel as not very favorable to the companies when compared to Chapter 11 regulations in the U.S. As a result, turnaround specialists are forced to get involved prior to the declaration of bankruptcy and cannot afford to wait until bankruptcy is declared because it is usually too late at that point to resurrect the distressed company or represent it successfully in court.
The panelists went on to debate the virtues of the U.S. bankruptcy laws and specifically Chapter 11 bankruptcy protection. While they felt that the US laws are much more favorable to distressed companies who may remain in Chapter 11 for years on end, Arnon insisted that it helps companies who face unforeseen circumstances (an example would be 9/11) to recover if they still have a sound asset base. On the other hand, as Bretschneider pointed out, there is usually a compelling reason they have faced such distress in the first place. In many instances, the exit strategies differ among international players -who sometimes decided to hold the assets and not exit via a market or strategic sale right away -as long as the company remains profitable.
In conclusion, the panelists offered the HBS students some advice as to the skill set they felt would be necessary for success in the industry. “Telling the truth,” a large and expandable Rolodex, the ability to turn “enemies” (suppliers, buyers, sometimes employees) into friends, and a high level of diplomacy were all cited as important ingredients. Compassion was mentioned several times as an important skill as HBS students left the room pondering how they would balance their urge to whip companies into shape with the right dosage of empathy.