Playing the turnaround game is tougher these days, said John M. Collard, the chairman of Strategic Management Partners Inc., a consulting firm in Annapolis, Md.
The reason: Easy financial conditions over the past decade have allowed companies to deteriorate operationally to a degree that would not have been tolerable to backers in the past, he said. “Until the credit crisis hit, companies never fixed the fundamental underlying problems they had.”
A turnaround consultant for 23 years, Collard said he has never seen an environment this extreme.
“In the last year or 14 months, I’ve been asked to look at a dozen companies,” said Collard, who works primarily with financial sponsors but also with strategic investors, as an adviser and sometimes interim CEO. “In all 12 of those situations, I said the value is gone, don’t waste your time. Ten of those companies have already filed for bankruptcy or liquidated.”
As a result, buyout firms that invest in distress must broaden their search. Buyout pros like to talk about the “funnel,” in which they receive 1,000 business plans, review 100 of them, diligence 10 deals and close one, he noted. “Today that funnel has gotten so much wider at the top. You need to look at 3,000, 4,000 or 5,000 business plans instead of 1,000.”
A dearth of viable turnaround candidates makes dealmaking tougher for sponsors. “I see a market on the sidelines,” said Collard, who spent a decade as an executive at the defense contractor Lockheed Martin before launching his firm in 1988. “A lot of that money is sitting on the sidelines because deals are hard to come by.”
Another problem with the current environment is a lack of bold national initiatives to drive private investment in struggling companies, said Collard, who cited efforts from Eisenhower’s national highway system to the privatization of the Internet as government programs that led to bonanzas for business. “Just look at what came out of the space program.”
Green energy could be such an initiative to drive competitive advantage for the nation, despite recent high profile failures in green manufacturing. “Taking a stake in a distressed company is an extremely high risk proposition. Even if you have control, it’s high risk, because by definition, they’re in trouble,” he said. “There’s a lot of money to be made by investing in distressed companies, but before you write that check, you have to know exactly how you’re going to make that money.”
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