The restructuring of corporations, whether purely financial or in response to changed market conditions, is becoming one of the most complex and emotionally charged business challenges.
In many respects the modern restructuring experience is like being among warring tribes – creditors take on debtors, junior debtors defy senior bondholders, hedge funds try to outwit longer term shareholders, and managers and board members confront politicians and the trade unions. Teams of advisors, drawn largely from banking, the law and accountancy, patrol different but overlapping corners of the battlefield. And wild rumor – that mercenary menace especially pervasive in the online media – stalks and ambushes the unwary.
What is new for participants in the current restructuring cycle is a level of complexity unfamiliar to previous generations. Companies are now increasingly located in different territories and operate under several jurisdictions; balance sheet structures are entangled by layers of separate holding companies; and share-holders and creditors breed like multi-cultural polymorphs.
In the next 18 months the number of distressed debt deals in most developed countries looks set to jump sharply. Ideally, stakeholders will pull together behind closed doors to find the optimum solution – be it selling off a business, renegotiating or writing off debt, injecting fresh capital, or closing a plant – and communication will be kept to a minimum. But in the real world of stakeholder “tribes” with conflicting agendas and ambitions, participants should not count on it and should brace themselves for open and protracted warfare.
A first class communications strategy for today’s restructuring challenge requires in our view three key dimensions: a strong grasp of the new rules of media engagement, an ability to anticipate the likely reactions of opposing “tribes”, and a preparedness to work in a financially ambidextrous multi-cultural environment.
Understanding new media’s role
Corporate restructuring has always been politically and economically sensitive – but never more than it is today. Every type of media outlet from daily newspaper and television to financial wire service and online blog is likely to be interested in the progress and outcome of transactions likely to affect employment and corporate ownership.
The media’s role has become all the greater in the wake of the economic crisis, fueled in part by public anger at the role of financiers. Whereas restructuring stories appeared largely on the business pages in previous recessions, non-specialist journalists are now eager to learn more about, and write about, the seemingly arcane world of debt finance. In their quest for novelty, it should be noted, exaggeration and cliché – “all private equity funds are vultures” – are particular risks.
The online world, connecting media commentators via blogs, online publications and social networks, presents opportunities as well as threats. General Motors, for example, used the internet to good effect to provide a regular update on the positive aspects of its huge restructuring in process, presenting the new GM post Chapter 11 at http://www.gmreinvention.com/. Trade unions in France, meanwhile, have created a blog which systematically tracks distressed LBOs where employees are at risk, and use it as a manifesto for protests and public actions see http://www.collectif-lbo.org/accueil.html
Today’s restructuring participants must also deal with the constant attention of highly specialized online debt publications whose job is to track down every new twist and turn in a negotiation. “Vivons cachés, vivons heureux,” say the French, but it seldom happens.
The views of the specialist reporters and commentators, updated several times a day, can be highly influential. They feed on briefings from a large variety of sources close to the deal, with private information often leaked. Details of meetings considered confidential by those attending them suddenly appear in the public domain. The journalists writing these reports are generally quick, well-informed and financially literate, familiar with the technicalities of topics such as mezzanine finance, PIKs and debt-to-equity swaps. An open and trusting dialogue with this community is essential.
Lining up the other players
Typical transactions, whether they are pure debt restructurings or full operational reviews of a business, involve a range of stakeholders with competing agendas. Shrewd players improve their own chances when they understand the likely tactics and bargaining position of the other “tribes”, and adapt their communication efforts accordingly.
Banks, for instance, are in a tougher negotiating position than they were a decade ago. The crisis has not only weakened their finances but, rightly or not, stained their reputation as prudent and responsible lenders. In several restructuring situations they have struggled to make their case: some shareholders and new sponsors, moreover, have gained the upper hand by playing the “bankers are guilty” card. In the current environment banks have to communicate with especial subtlety – if forced to accept a significant write-off on a loan the last thing they want is a banner headline. Government support, moreover, imposes additional public and media pressure to put job protection as the key priority. It helps to have been seen to contribute to a “peaceful” dialogue. Lenders to Autodistribution, the leading French auto part distributor that filed for creditors’ protection this year, may have suffered significant write-offs but they won plaudits for their visible “pre-pack” agreement with the company and its sponsors.
On the media front, hedge funds are also more vulnerable today than they were in their lower profile infancy a decade ago. Media opinion is generally negative, not least toward those who buy distressed debt at a discount on the secondary market either to make a quick profit or pick up equity on the cheap through “loan to own” transactions. Those that invested in the debtor-inpossession loans of United States auto parts maker Delphi were openly accused of speculation and opportunism.
The crisis, meanwhile, is requiring private equity funds to develop a new and (to them) unfamiliar communications style. Silence and total discretion, the default position at least for those players not publicly listed, is no longer an option. The public expectation is for a new spirit of transparency and clarity.
Suppliers, customers and employees frequently feel neglected during restructuring transactions – yet their confidence can be critical to the outcome of the deal and therefore keeping them in touch with the different steps in the process is vital. Local politicians, eager to please their constituents, are also inclined to express their views and need to be kept abreast of what are often complex developments.
Breaking the cultural barrier
Among the impacts of globalization on restructuring, the wide range of national cultures influencing a negotiation is often overlooked. A multinational company, after all, operates in many different countries. Monier is a good example: based in Frankfurt, the company’s management is German, its main shareholder was French private equity fund PAI, and the bulk of the creditors, mainly bondholders, were based in the United Kingdom.
The Monier case, which involved intense discussions on the fate of more than 5,000 employees, received pan-European media coverage from leading print publications in France, Germany and the UK. The challenge for stakeholders was to communicate a story and set of messages that resonated in all three countries, a task that required issuing press releases and internal communications, and conducting interviews and background briefings, in a variety of languages.
Most countries are now establishing distinct legal frameworks to safeguard vulnerable companies. Having grown in different domestic markets and jurisdictions, international companies are sometimes eligible for different forms of legal protection, depending on where the weight of their business is located.
Thanks to this fragmentation of legal jurisdictions – and the way this plays out in restructuring negotiations – language skills offer an increasing edge. Multi-language cross-border commercial court battles, indeed, may become one of the next big communication challenges. French liquor group Belvedere, for example, has been engaged in an intense legal battle with its creditors, most of them distressed debt funds. When the group filed for French “sauvegarde” protection in July 2008, creditors opposed it, on the grounds that the move was illegitimate. Months later, a second assault was launched by the creditors through a legal request filed in Poland. Both camps summoned legal experts to express their opposing views in editorials, highlighting the importance of cultural sensitivity and the ability to understand the subtleties of a differing national perspectives.
It’s all about value
The number of complex restructuring transactions, including distressed debt deals, looks set to grow. Media scrutiny will intensify where bigger and more famous fish are involved and where each new skirmish or national ruling appears to favor one camp or the other. As discussed, it will be important to understand the media landscape, the different players and the complex cultural landscape – but communications professionals should not overlook one overriding but easily forgotten issue. Hostile and bloody the battlefield may inevitably become, but the purpose of a restructuring is to rescue a business and to maintain value for all stakeholders in the long run. Anything that undermines this – including over-aggressive communication and needless public posturing – must be avoided.
Jerome Biscay is a Partner in Brunswick’s Paris office. He previously held senior posts at Compagnie Bancaire (Paribas group), Bear Stearns, Bankers Trust and Deutsche Bank.