Hogan Lovells

Hogan Lovells

Tuesday, February 14, 2012

Salvaging Positives from Distress – A Bankruptcy Lawyer’s View of the Current Global Economic Turmoil

By Robin Keller, Head of the US Business Restructuring and Insolvency Practice at Hogan Lovells US LLP

During the New Hampshire primary, emphasizing lessons learned from his experience as a turnaround manager at Bain & Company, Mitt Romney said he wanted Americans to be able to switch insurance companies if they were unhappy with their service.

"I like being able to fire people who provide services to me," he said. "You know, if someone doesn't give me the good service I need, I want to say, 'You know, I'm going to go get someone else to provide that service to me.'"

This abbreviated articulation of certain fundamentals of the benefits of competition launched a flurry of attacks on Romney’s work investing in and turning around troubled companies while at Bain, including allegations that efforts to turn around firms result in layoffs, plant closures and the like and are destructive. However, even Ron Paul defended Romney, stating that his work at Bain was based on free market concepts. “You save companies, you save jobs when you reorganize companies that are going to go bankrupt," Paul said.

Basic principles of right-sizing a struggling business are now topics of daily discussion on the international scene, as the governments of Germany and France struggle to understand how to rein in Portugal, Italy, Ireland, Greece and Spain, who threaten to take down the financial system that underlies the EU with their excesses of public spending and inadequate developments in revenue generation.

Fundamental principles of insolvent restructuring apply to governments as well as businesses. These include:

  • Taking a hard, realistic look at the fundamentals of the business – revenues, costs, risks and prospects. You may need to go outside of your day-to-day managers to do this, as people are reluctant to question their own assumptions (see how Germany is doing this for Greece; London bankers for Iceland).
  • Recognizing that some businesses are built on failing models or products that have become obsolete or are heading toward obsolescence (buggy whips, large gas-guzzling automobiles, newspapers, paper producers, coal-driven steel plants, economies based on huge public employee pension and benefit plans).
  • Understanding that “creative destruction” of failed structures can lead to the adoption of new methods that ultimately improve businesses, cultures, lives – See UK under Thatcher; Russia under Putin (until recently).

Bankruptcies and out-of-court restructurings have resulted in the re-allocation of trillions of dollars of assets to more productive companies and uses. If a company or a business line has failed, you need to let go of the failed managers, plants or ideas and re-allocate the assets to new, more productive ideas, locations and opportunities.

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