Deal Making In Stormy

Capital Markets
A sense of GFC dj vu ?

Nicholas Assef
January 2016

With a clear sense of dj vu the global markets have

commenced 2016 with a return to extreme volatility

Whilst we of course hope that this negative environment is short lived, the CEO and Board
of Directors always need to live by the old adage of hope for the best, plan for the worst
As such it is useful to reflect on a number of the factors that took place during the GFC,
and, with the benefit of hindsight, how best to position for the maintenance of shareholder
value if this volatility continues
These observations are in no specific order, and are a sample of those which were worked
through extensively with clients across the turbulence & challenges of the GFC period
What This Note Covers :

I. Valuations Become Irrational

I.

Valuations Become
Irrational

The media love a bad news story, and turbulent markets bring amplied alarmist media
comment

II.

Board & Management

Paralysis

III.

Higher Offshore Led

M & A Activity

Companies see their valuaons trade in wide ranges, which oen make tradional valuaon
approaches dicult. For Research Analysts covering sectors the task is dicult as the base
input assumpons many use for their DCF models are oen uid. For the CEO & Board it
is dicult to ignore share price acon oen feeling as a helpless passenger on rough seas

IV.

Balance Sheet Health

Can Change Quickly

V.

Cashflow King
Counterparty Risk Up

VI.

Innovative Financing &

Refinancing

VII.

Liquidity In Trading
Volumes

VIII.

Activists, Short Sellers

& Private Equity

IX.

Mergers For Necessity

X.

Higher Quality
Dealmaking

As noted elsewhere in this paper the CEO must become an evangelist at these mes with
all stakeholders internal and external. Stressing the posive dierenators as to why
their company is the investment of choice within its sector. Increased me and care
needs to be taken on the development of investor presentaons and various stock market
releasesquality over quanty

II. Board & Management Paralysis

During the GFC many public company Boards decided that no acon was the best acon.
Unfortunately this no acon posion is actually a decision of paralysis. Comparisons such
as we are doing the same as our competors do not win the applause of instuonal investors or the invesng community at large
Conservasm should be replaced with exibility and the ongoing search for innovaon
and excellence. Ongoing posive communicaon with stakeholders of meaningful developments is mandatory. More shoe leather will be worn out in the process. All opons to
generate posive shareholder value should be explored
Astute Boards and CEOs also know that now is the me to opportuniscally strike when
valuaons are low and the alternaves for that interesng acquision Target are few
Strong and decisive leadership will not make the markets sele, but it will ensure that the
CEOs company, its employees and stakeholders are condent that their Board and Senior
Management are commied to nding a way throughand not being the proverbial
feather blowing in the wind

Nicholas AssefJanuary 2016

III. Higher Offshore Led M & A Activity

Currency uctuaon amplies the valuaon advantages oen enjoyed by Bidders that operate in larger more liquid capital markets. Those Bidders oen have higher trading valuaon metrics for a variety of reasons, which this paper will not go into. Suce
to say they have a real strategic advantage as a Bidder
We have seen a material increase in oshore inquiry as the Australian dollar has fallen. We expect this trend to connue and
the advantage of those Bidders to be amplied by the volality.
For the CEO / Board under pressure it is important to ensure that they can market to internaonal suitors who may look for established beachheads in countries such as Australia to launch into Asia. Astute Boards are pro acvely encouraging internaonal
strategic alliances to not only gain access to new markets at trying mes (and hopefully generate foreign currency cashows) but
also to keep wired in to regions from where a Bidder may emerge

IV. Balance Sheet Health Can Change Quickly

CEOs & their Boards need to be acutely aware of the debt covenants inside their
debt facility agreements, and how market volality might eect them. Many facility agreements are not linked to things such as share price and market capitalisaon but some are
There is nothing more problemac for the CEO / Board to discover suddenly that
there is a technical problem with exisng debt packages and any clarifying announcement to the stock market of a problem will likely be met with extreme negavity. Addionally, with increased counterparty risk a sensible assumpon, cashow can be placed under pressure with lile noce.
Although it is not what CEOs and Boards want to hear, non core asset divestments,
equity placements & debt renancings early can ensure healthy Balance Sheets are
maintained through this turbulence and can even allow expansion opportunies
to be moved upon when they undoubtedly present
I recall one CFO during the GFC nong to me that he was spoilt for choice for
deals as they had posioned well, and posioned early. With a lowly geared Balance Sheet and cash in the bank many beat a path to his door looking for a rescue

I recall one CFO

during the GFC
noting to me that
he was spoilt for
choice for deals as
they had positioned
well, and positioned
early

V. Cashflow KingCounterparty Risk Up

CEOs & CFOs need to be on guard about the stability of both their cashows and counterpares (clients) with whom they deal.
During the GFC many good companies quickly found themselves under pressure when it became clear that pares with whom
they dealt were themselves stumbling. With so commodity prices and stretched project nancing, the Resources sector in parcular becomes one where vigilance needs to be lied even further on counterparty relaonships
An eagle eye on debtors needs to be maintained during volality to ensure that cashow stability is maintained. It can be prudent to rene various operaonal aspects of the Company such as rening credit terms to ensure the risk prole of inbound cashows does not increase

VI. Innovative Financing & Refinancing

Commercial banks oen become more conservave in dealing with both exisng clients and new loans. For those public companies with loan maturing across 2016 and early 2017 geng started on the renancing early is crical
M & A nancing can become eecvely more expensive as a result of lower loan valuaon metrics being imposed with the equity to be provided by the Bidder increasing, and oen as a result making the prospect of an acceptable nancial return more
dicult to achieve
Oshore lenders, foreign bond issuers, mezzanine debt funds and mul faceted lenders (including hedge funds) entered the market during the GFC, and we expect to see this trend li again. There are mulple alternate sources of nancing to the tradional
banks, and the CEO & CFO need to understand the exibility of alternaves in order to properly advise their Board
Nicholas AssefJanuary 2016

VII. Liquidity In Trading Volumes

For Mid Market and Small Cap public companies volality can lead to rapid illiquidity in their share trading acvity. An incredibly
frustrang situaon for the CEO & Board
The ight to liquidity oen means that both instuonal and retail shareholders rotate their porolios to Index rated
companies where liquidity connues during turbulent trading condions
This shi in focus also can have a knock on eect for market parcipants such as stock brokers, who change the focus in the way
they change the servicing of their clients from speculave to conservave
CEOs need to be innovave in their approaches to ensure exisng shareholder support is maintained, and for potenal new
shareholders that the Company is highlighted as being an opportunity of choice despite irraonal valuaons & low liquidity.
Placements & other equity capital markets iniaves should be considered where strong appete from a party is expressed.
Diluon should be a secondary consideraon to Balance Sheet health and aracng new investment before it is needed

VIII. Activists, Short Sellers & Private Equity

Declining valuaons and illiquidity are ideal market condions for Short
Seller Funds, Acvists and PIPE players (Public Investment By Private Equity). The majority of Board Members and CEOs of public companies have
not had experience in dealing with these market parcipants and
turbulent markets can be a tough me for the rst lesson
PIPE players have the opportunity to take public companies private at
heavily discounted valuaons to those in normal trading condions
Acvists & short sellers can also take the shape of wolf packs and informally (not forming legal associaons) gang up on CEOs and Boards to
aempt to force change. Responding to such disruptors is me consuming,
expensive and distracng reducing the me the CEO and Board have for
opmising eorts to manage and grow shareholder value. Board and CEO
paralysis are the ideal condions for disruptors to ourish

IX. Mergers Of Necessity

Not all companies struggled during the GFC.

The astute took the
opportunity to position for
tomorrow with
opportunistic M & A deals
& well planned growth
initiatives

With Mid and Small Cap companies the rapid decline in Market Capitalisaon can have a knock on eect of making the Corporate
costs to business size disproporonal, and the ability to raise meaningful capital remote. This includes things such as CEO and
Chairman pay which both can become the focus of Acvists.
In this environment merger for necessity can be a raonal outcome, and for the CEO and Board exibility in thinking on this area
can pay dividends. Being the iniator as opposed to the respondent to a Merger Proposal is preferenal
Any merger should, of course, result in a material shi in the value proposion of the 2 merger parcipants post transacon.
Ideally for Mid Market companies they should be focussed on achieving some form of Index weighng, or for smaller players
achieving a market cap / enterprise value with corresponding liquidity that emerging instuonal funds will take interest

X. Higher Quality Dealmaking

Warren Bue is famous for his saying in his 2004 Berkshire Hathaway Chairmans leer : Investors should remember that excitement and expenses are their enemies. And if they insist on trying to me their parcipaon in equies, they should try to be
fearful when others are greedy and greedy only when others are fearful.
Turbulent markets are a rich hunng ground for astute Bidders, and savvy management teams that see the opportunity of Public
to Private transacons. Paralysis should be replaced with that sense of opportunity to drive shareholder value with a compelling
transacon or transacons

Nicholas AssefJanuary 2016

Key Take Away For CEOs & Boards of Directors

Volatile market conditions pass. For the astute CEO and Board the opportunity is to understand how to both maintain and maximise shareholder value in trying market conditions that are trying for all companies

Three key learnings from the GFC period that should be front of mind are :
1.

Balance Sheet gearing can have a direct impact on the equity valuation of the Company. Equity value can be driven
down irrationally where it is perceived that there is either too much or poorly structured debt (including near term refinancing requirements)

2.

Certain market participants flourish in these conditions. CEOs & Boards need to have specific strategic plans to deal with
Activists, Short Sellers and opportunistic Takeover Proposals in particular where presented by Private Equity players
who are on the whole both patient and sophisticated

3.

Opportunity knocks. Maintaining flexibility and being pro active pays dividends. The deal that may be a company maker
is likely within reach at a compelling valuation & attractive terms. Expansion with strategic alliances (both domestically
and cross border) should be considered and pursued. Be on the front foot. Plan how to grow stronger and execute those
plans

Hopefully these market conditions will settle in the coming months, but in the event they dont then for the CEO and Board understanding both the challenges that will come and having decisive positive action plans to deal with those potential challenges is a
prudent and logical investment of time
Start today. Get a jump on your competitors that will likely assume the position of paralysis

For over 10 years Lincoln Crowne & Company has helped public companies, financial sponsors and government entities deal with
challenging strategic M & A transactions, corporate finance & strategic advisory initiatives
Across the GFC period LCC worked along side its client CEOs and Boards on tough problems & opportunistic decisions by providing
experienced, independent advice on:

M & A initiatives comprising both domestic and cross border mergers, opportunistic acquisitions and divestments (including non
core assets - in whole or part)
Dealing with negative events including slowing corporate performance, activist investors, contentious shareholder issues and
Joint Venture disputes
The development of organic and inorganic growth strategies that would endure stormy market conditions and position the client
to deliver positive shareholder value
Capital management optimisation strategies including building the case for such initiatives as on market buybacks, potential
equity raisings and debt refinancings

Nicholas Assef

LLB (Hons) LLM MBA

Execuve Director

Tel :
E:
W:
T:

+ 61 2 9262 2121
naa@lcc.asia
www.lcc.asia
@NicholasAssef

Nicholas career has spanned the legal profession, academia and the corporate world for over 25 years
Formerly an attorney with Allen Allen & Hemsleys corporate practice in Sydney, Australia his career evolved to investment banking after completion of his MBA at the
world ranked Simon Business School at the University of Rochester (New York). Whilst in the USA Nicholas also had the opportunity to undertake study at Harvard
Business School. In academia Nicholas has been on staff at both Macquarie Universitys Applied Finance Centre and Bond Universitys Law School. Nicholas
speaks regularly on topics including strategy, leadership, shareholder value and business performance
Nicholas works across the Australian and South East Asian markets, specializing in M & A, shareholder value driven initiatives, corporate performance and complex
commercial negotiations. He has also had extensive specific experience dealing with Activist investors (acting both for them, and against them)

Nicholas AssefJanuary 2016