September 2010 - Association for Corporate Growth

Cover Story
plan, a mandate he worked in the late 1990s. Following a
systems breakdown, executives couldn’t readily distinguish
between the profitable and money-losing contracts. “You
had to dig through, and do it manually. What we discovered
was that it was abundantly clear which accounts
weren’t worth keeping.”
Reliable information also allows executives to act with
speed and certainty. A factor in many instances of distress,
Koch says, is that managers tend to be in denial.
“They may rationalize that a company or unit is just going
through a difficult quarter,” he says.
While hope is what drives growth, in a deteriorating
situation it becomes the void that
creates the spiral. Hence, executives miss opportunities
re-align their business. To play
catch-up after a certain point managers will
have decisions made for them. “With the passage
of time, your options burn off,” Koch
notes, contrasting that tendency with those of
successful companies that “are always looking”
for weaknesses.
The GM bankruptcy provides a case study in overcoming
distractions. Consider the period between mid February
and mid April, last year. The company devised four
options as part of its bankruptcy prep program, devising
“cram-down,” “pre-pack,” “NewCo” and “out of court”
strategies. Executives were able to procure a bridge loan
from the Canadian government, while negotiating the final
loan package. This was roughly around the same time
that GM started exploring the feasibility of a 363 sale.
Amid all of this, Rick Wagoner was forced to step down
by the US government’s Auto Task Force, clearing the way
for Fritz Henderson to assume the role.
On the same day GM submitted its third plan of viability
to the government, the Auto Task Force responded
by criticizing the scale of the plan, and set the clock at 60
days for the company to come up with something new.
Throughout all of this, GM was working with the UAW
to finalize a new contract; negotiating to sell brands such as Hummer
and Saab; working with Delphi to assure the liquidity of the
parts maker, but still had to take steps to procure new sourcing arrangements
should Delphi be forced to liquidate.
This two-month stretch drives home the unique nature of the
GM bankruptcy. Yet Koch cites that every turnaround has its distractions
– “it’s unavoidable.” As cash dries up and covenant violations
approach, attention is suddenly directed to lender presentations,
finding sources of liquidity or calls to comfort the supply chain. It’s
paramount that executives navigate around the distractions and stay
focused on the business.
Viewing the Turnaround Through an
M&A Lens
General Motors’ M&A strategy was centered around one number – 10.5 million.
That’s the number of units GM has to sell to breakeven under its new
strategy. According to Koch, the number was established using a conservative
estimate of North American auto volume and GM’s marketshare, constructed
for five years.
“That drove decisions around what assets would
go to the new company and those that would be left
behind,” Koch said. The result has been a string of
sales and exits involving one-time formidable brands,
such as Saab and Hummer.
GM went back on the offensive in July, acquiring
Americredit for $3.5 billion; a deal that again positions
GM for growth after two years of rationalizing.
But GM’s revitalization extends well beyond the auto giant. The rationale behind
the government’s funding was that a GM collapse would reverberate throughout
the sector, all the way down to the smallest suppliers. Kevin Marsh, a director and
co-founder with Michigan-based investment bank Angle Advisors, notes that the
company’s return to health has had the same effect.
“I’m not sure GM would’ve been able to do it as quickly without the government’s
help, but the turnaround has delivered a tremendous amount of liquidity to
the suppliers,” Marsh says.
He notes, however, that the liquidity hasn’t yet translated into abundant deal
volume. It has allowed suppliers such as Hayes Lemmerz and Cooper Standard,
among others, to exit bankruptcy. Visteon, as of late July, was nearing an exit as
well. Actual deal activity, though, has yet to really gain momentum.
“The challenge is still credit availability,” Marsh adds, noting that lenders still
view the automotive space as toxic.
If there is a benefit to a crisis, it’s that it forces companies to confront
issues. In today’s environment, in which flat is the new up,
businesses can either be content to muddle along or management
can take the initiative and be proactive about forcing change.
Koch notes that he’s seeing a lot more companies address their
turnaround plans before it hits crisis stage. There are a few caveats to
starting early, however. Beyond not having the advantage of bankruptcy
to clean the slate, it can also be harder to get employees to buy
into a turnaround. “If there’s no ‘crisis,’ people are much less inclined
to get excited,” Koch says. Still, the transition from mere “strategic
issues” to “liquidity concerns” has never been shorter. If GM teaches
the market anything, it’s to fight the tendency to put off a fix.
28 MERGERS & ACQUISITIONS September 2010