It is often said that the best CEO is the one who waits until the last possible moment to make a decision, thus ensuring that they have all available information and can make the best decision for the company based on that information.

But what happens when the CEO or management won't make that decision? What impact does that have on a restructuring?

I have seen restructuring examples where all parties agree that certain parts of the business need to be shut or sold off only to have the decision deferred, often on spurious grounds. Many years ago, I was involved in an acquisition where the sale of one of the businesses was agreed but, once the vendor's CEO had flown out of the country, the remaining management declared that they had no interest in selling the business. Quite a surprise. There was clear conflict between the CEO and his local management team and we had to wait until the CEO returned to finalise the acquisition.

In certain restructurings, you wonder how many losses the business must suffer before management take the necessary closure or downsizing steps. Is it misplaced optimism that trading will somehow miraculously turnaround? Is it a failure to recognise that the fundamentals of the business or the market it operates in have shifted? Is it the likely loss of face on the part of management if they admit failure and close the business? While the business remains open, it is easier to give the impression that it is operating normally although anyone privy to the financials knows the real story.

In some instances, the rationale for continuing to operate the business can be perplexing. I have seem examples where management proposes shutting part of the business but retaining all the employees without reallocating them to other business units. Retaining all employees would not remove the continuing financial burden of these costs on the business. Plans to change their remuneration structure to reduce costs would have constituted termination in some jurisdictions. While it is understandable that terminating long-term employees is a difficult step, retaining them on the payroll is likely to cause further harm to business finances.

Where there is a failure by management to make a decision, the most obvious solution is to escalate the issue to the ownership level. The shareholders can then impose their decision on management or replace management with those who will implement their decision. This becomes more complex if management has a shareholding in the business or, as is often the case in Asia, management are related to one or more of the major shareholders. In such cases, it will be difficult to have management replaced in order for the restructuring to proceed although I have seen examples where the relevant management are promoted out of the way to allow the restructuring to proceed.

If an impasse is encountered, it may only be possible to complete the restructuring up to a particular point with recommendations on further action. Ultimately, it is up to the relevant management and owners to make decisions regarding a restructuring. There is little further to be achieved if, for example, shareholders will not commit the appropriate level of funding for the business or will not agree to the necessary management changes to enable the restructuring to be completed.

PELEN

April 2018

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Often while working on a restructuring, there is a point in time when you get a real sense of whether it will succeed or not.

What seem like endless meetings making no progress reach a point where seasoned advisers can determine with a reasonable degree of probability whether the business will survive or whether it will be consigned to the corporate scrap heap.

There are, however, no guarantees.

All successful restructurings require buy-in from stakeholders. This includes shareholders, management, lenders and other creditors as well as significant customers. When one or more of these groups or a significant member of any group is at odds with the restructuring proposal, the chances of success diminish.

Many restructurings involve a dilution of existing shareholders' holdings or a debt haircut or write-down by lenders and the agreement of both these groups is crucial to success.

Often, it is best to ensure that the banking personnel involved in the original lending are not part of the restructuring process to remove any emotional tension between the lender and the debtor's management.

I have seen restructurings fail or taken to the brink of failure for many reasons.

In one major restructuring involving the first ever public listing swap in that country's history, the new investor almost pulled out of the transaction when they discovered the founder's brother was still on the company's payroll. The fact that this person passed away five years earlier did not seem to bother the founder but was very troubling for the investor.

Restructurings can fail due to reluctance on the part of owners or management to recognise that the business environment has changed and the business in its current form is unlikely to ever be profitable. If agreement cannot be reached on the closure of unprofitable parts of the business, there may be little point continuing with the restructuring. Sentimentality has no place in restructurings.

At times, external issues determine the course of a restructuring. Economic and political events may impact on the business. As strange as it may seem, restructurings can fail due to issues such as alcoholism and other addictions on the part of business owners or management. Draining business cash flow to fund owners' personal lifestyles is another potential death knell for a restructuring. These personal issues can affect the business to the extent that a restructuring becomes non-viable. Some form of lifestyle adjustment by business owners is often inevitable if the business is to survive.

There may be examples where a restructuring can be brought to a successful conclusion without full commitment from all stakeholders but it would generally be the exception rather than the norm.

PELEN

November 2017