A host of companies have sold their stakes out in distressed situations in the recent past.
It was 4:00 am on March 15, 2010. Some 15 pints of Häagen-Dazs’ Rum Raisin & Rocky Road ice-cream flavours were being carried into the fourth floor office of Peter J. Solomon Co., on 520 Madison Avenue in New York City by a catering staff, which was understandably oblivious to the sensitivity of the discussions going on. Peter J. Solomon was advising Philips-Van Heusen (PVH) on its acquisition bid for Tommy Hilfiger. Some three hours and fifteen minutes later, the world knew – Tommy Hilfiger had been sold-off by Apax Partners to PVH for $3.1 billion. For a brand that fell from grace over time and was first rescued by a PE infusion from Apax, it was a new lease of life. At the time of the deal, Tommy’s debt stood at around $695 million. On similar lines in the technology space, the acquisition of Sun Microsystems by Oracle in a $7.4 billion transaction in 2010 was a distress deal that leveraged the recession to the tee. Sun had been finding it difficult to sustain its toplines post the dotcom bust and competition from larger players like IBM (which was incidentally a suitor as well), and found the perfect foil in Larry Ellison.
The road to hell is paved with good intentions. But call it good karma, a late flash of brilliance, divine intervention or plain good luck, corporate history is riddled with stories of companies that erred magnanimously, faced the music, and yet managed to wriggle out of the mess they found themselves in. Their saving grace – M&A. What was common in both the transactions mentioned above was that they were, what the Wall Street investment banking hedgers sipping the ‘bucks coffee in their pinstriped suits would sniggeringly call ‘distress deals’ – a tactical option that has suddenly found increasing usage globally in the recent past, encouraged odiously by the numbing economic slowdown. Distress deals clearly are a last resort help-us-from-drowning callouts by the company selling out. While that’s a fair call for the one over the cliff – a do or die option, if you may – the question is, do such deals really work out? Specifically, for the acquiring company’s balance sheet?
Some momentous cases marked the inevitability of the distress deal trend in the contemporary era.
The bankruptcy of Lehman Brothers had left the financial world speechless. Even the Fed was clueless till Bob Diamond, CEO, Barclays, emerged as a saviour. Till then, the Fed had two ideas. Plan A was to find a buyer for Lehman – and if they failed, Plan B was to run Lehman on their own. By the time Diamond surfaced, Fed had already given up on Plan A. But far away from the worried Fed officials, Bob was in his element. They had no clue till the deal makers met them at the 31st and 32nd floors of the Lehman Brothers building, hours before the news became public. Barclays bought Lehman’s investment banking and trading unit for $250 million and its New York headquarter and two data centers for $1.5 billion. The Fed breathed a sigh of relief, and so did many employees.
Most still remember the Duke Energy-Progress Energy merger in July this year as a case of, some say, extremely deceitful corporate behaviour. But Progress Energy was a company in deep trouble with unmanageable costs and debt, especially since it accidentally damaged the containment structure of the 860 MW PWR Crystal River reactor in 2009. The $26 billion deal, which included the takeover of a humongous debt load of $12.2 billion on the books of Progress, was indeed a face saver for the latter. Unfortunately, the same can’t be said of its erstwhile CEO Bill Johnson, who was – with artful chicanery – offered a $45 million package and shown the door by the board within two hours of becoming the CEO of the merged entity. Jim Rogers, CEO, Duke Energy, eventually took over the top job.
It was 4:00 am on March 15, 2010. Some 15 pints of Häagen-Dazs’ Rum Raisin & Rocky Road ice-cream flavours were being carried into the fourth floor office of Peter J. Solomon Co., on 520 Madison Avenue in New York City by a catering staff, which was understandably oblivious to the sensitivity of the discussions going on. Peter J. Solomon was advising Philips-Van Heusen (PVH) on its acquisition bid for Tommy Hilfiger. Some three hours and fifteen minutes later, the world knew – Tommy Hilfiger had been sold-off by Apax Partners to PVH for $3.1 billion. For a brand that fell from grace over time and was first rescued by a PE infusion from Apax, it was a new lease of life. At the time of the deal, Tommy’s debt stood at around $695 million. On similar lines in the technology space, the acquisition of Sun Microsystems by Oracle in a $7.4 billion transaction in 2010 was a distress deal that leveraged the recession to the tee. Sun had been finding it difficult to sustain its toplines post the dotcom bust and competition from larger players like IBM (which was incidentally a suitor as well), and found the perfect foil in Larry Ellison.
The road to hell is paved with good intentions. But call it good karma, a late flash of brilliance, divine intervention or plain good luck, corporate history is riddled with stories of companies that erred magnanimously, faced the music, and yet managed to wriggle out of the mess they found themselves in. Their saving grace – M&A. What was common in both the transactions mentioned above was that they were, what the Wall Street investment banking hedgers sipping the ‘bucks coffee in their pinstriped suits would sniggeringly call ‘distress deals’ – a tactical option that has suddenly found increasing usage globally in the recent past, encouraged odiously by the numbing economic slowdown. Distress deals clearly are a last resort help-us-from-drowning callouts by the company selling out. While that’s a fair call for the one over the cliff – a do or die option, if you may – the question is, do such deals really work out? Specifically, for the acquiring company’s balance sheet?
Some momentous cases marked the inevitability of the distress deal trend in the contemporary era.
The bankruptcy of Lehman Brothers had left the financial world speechless. Even the Fed was clueless till Bob Diamond, CEO, Barclays, emerged as a saviour. Till then, the Fed had two ideas. Plan A was to find a buyer for Lehman – and if they failed, Plan B was to run Lehman on their own. By the time Diamond surfaced, Fed had already given up on Plan A. But far away from the worried Fed officials, Bob was in his element. They had no clue till the deal makers met them at the 31st and 32nd floors of the Lehman Brothers building, hours before the news became public. Barclays bought Lehman’s investment banking and trading unit for $250 million and its New York headquarter and two data centers for $1.5 billion. The Fed breathed a sigh of relief, and so did many employees.
Most still remember the Duke Energy-Progress Energy merger in July this year as a case of, some say, extremely deceitful corporate behaviour. But Progress Energy was a company in deep trouble with unmanageable costs and debt, especially since it accidentally damaged the containment structure of the 860 MW PWR Crystal River reactor in 2009. The $26 billion deal, which included the takeover of a humongous debt load of $12.2 billion on the books of Progress, was indeed a face saver for the latter. Unfortunately, the same can’t be said of its erstwhile CEO Bill Johnson, who was – with artful chicanery – offered a $45 million package and shown the door by the board within two hours of becoming the CEO of the merged entity. Jim Rogers, CEO, Duke Energy, eventually took over the top job.
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