The New Restructuring Talent Needed

Seldom does a week go by that I am not talking to a C-level executive or two whom is trying to position himself, or herself, to take advantage of their experience in turning around troubled companies. The logic of their thinking seems, at first blush, to be sound. In this deep and extended downturn, a ton of companies are hurting. One would think that the constituencies would be eager to replace management of the hurting companies.

When one talks to executive recruiters, the candid ones will admit that companies are not switching out management at a rapid rate. In fact, many…if not most…recruiters are struggling, just like the economy.

Every troubled company situation is unique; but, a common pattern is that everyone in management has their “head down” and is working harder than ever in an effort to hold onto their jobs. At the same time, the constituents are often, themselves, in disarray and therefore not pressing for changes in management at the rate one would expect with so much distress.

Regular readers of this blog, and experienced Restructuring professionals, know that the most common "fix" today is sale of the good assets of a troubled company pursuant to Section 363 of the Bankruptcy Code. And, most often, the assets are being sold to a strategic buyer who can add the assets to an existing operating platform.

Now anyone who thinks that buying assets from a distressed company and instantly creating real value with those assets is a simple process is likely to be in for a rude awakening. Creating real value will require buying the right assets at the right price, integrating them quickly and efficiently, and then managing the resulting entity effectively at a time when business models are changing rapidly and the economy continues a downward slide.

What is needed is a new type of C-Level executive and/or consultant.

One who is skilled at integration, nimble, fast, and comfortable with the nuances of managing in a period of unprecedented uncertainty. And, one capable of being a part of creating the new business models needed in industry after industry.

This is a great time for C-level executives and/or consultants who understand how much the world has changed and position themselves for this new world order. For sure, many constituents do not yet understand or fully appreciate this shift in necessary C-level skills. Or have the wisdom and courage to demand a change in management. But, the good news is that week by week, there will be an awakening. And, the new breed of C-level executives will get their opportunity to demonstrate how they can create real value.

Only the real value creators need apply!

Liquidations - America's Great Growth Industry

For years, the Restructuring practice in this country was fundamentally different than the U.K. practice. In this country, we had the "second chance" system. In the UK, it was more like three strikes and you are out.

In the U.S., Chapter 11 was designed to provide the troubled debtor with a second chance through a reorganization process. Heck, some companies even took multiple trips through Chapter 11, (hence the evolution of the concept of Chapter 22 [twice through an 11], Chapter 33 [three times an 11], etc.).

Our system was in sharp contrast to the U.K. norm where a failing business is effectively put in the hands of a trustee for sale to a third party.

For years, legal scholars debated the advantages and disadvantages of the two very different systems.

I find it somewhat ironic that the U.S. system has evolved to one that, at least for the time being, looks more like the U.K. system. Very, very few companies are emerging from bankruptcy. The norm in the U.S. has become a very quick sale of the "good" assets through a Section 363 sale.

Experienced Restructuring professionals know, as well as I do, some of the reasons for this change. Among the reasons are:

1. Near complete absence of DIP financing other than by hostage or vulture lenders,
2. Common absence of unpledged assets or assets with greater value than secured debt associated with the asset, and
3. Unprecedented levels of uncertainty as to the economy and as to changing industry conditions.

Today, with rare exceptions, most Restructuring firms are getting more of their revenue from liquidation activities than the from turnaround activities.

Of course, most professionals dont see it as very grand and glorious to present oneself as a liquidator. So, organizations like the Turnaround Management Association (“TMA”) flourish, while the commensurate liquidation association has yet to be even formed.

Let's be clear:

One of this country's greatest growth industries is liquidations.

Those who recognize this fact, embrace the notion, and aggressively pursue the opportunity will be among the winners among professional service firms in the coming decade.

It is fascinating to watch some law firms, some consultants, and some specialty firms quietly building the future winners...while some dinosaurs congregate around the watering hole BSing about how well they are doing and subtly asking each other when the market for turnaround work will heat up.

Change presents such great opportunities for those who truly embrace it.

Google Dominates Restructuring Field

Yes, you read that headline right!

I believe that Google is doing more to Restructure America than any single Restructuring firm. (OK, I have been known to be slightly outrageous to make a teaching point, or two.)

Truth is that most Restructuring firms...or at least those involved with consulting…are doing more work in connection with liquidations and with forensic activities than they are doing true turnaround consulting. For me, that is sad, as I was hoping that the Restructuring industry would be on the forefront of driving the changes need to make American companies more consistently competitively on a global basis.

From my vantage point, regretfully, I don’t see constituencies pushing for radical restructuring of business models and operations of troubled companies. Much more common is either (1) governmental intervention, and/or (2) bankruptcy followed by quick sale of the good assets in a Section 363 sale.

Fortunately for America, Google’s impact is being felt and industries are being restructured, albeit frequently without the help of turnaround consultants, or even any consultants. Companies, of all sizes, in a host of industries, are being forced to change to survive. And survival is frequently being driven by forces on which Google has capitalized.

Let me be clear, Google is not driving all of the change that is occurring. But,

the transition to a true information era, where enormous, relevant information is so instantly and inexpensively available, is creating intense pressure on many companies just to change to survive.

Google is a part of the force driving change, but certainly not all of it.

So, yes my headline was somewhat tongue-in-cheek. But, only somewhat.

Want to better understand the impact Google (and the related information age changes) is having. I strongly recommend Jeff Jarvis’ recent book, What Would Google Do?

Having spent virtually all of my working life in and around the Restructuring industry, I keep hoping that the industry will be a part of the redoing of the business models needed in so many industries. Sure there is good money to be made in liquidations and forensics, but there is too much talent in the industry for it to not mobilize to be a part of the re-engineering of the American economy.

At least, that is my fervent hope!

The GM Turnaround

No, I am not making an early call as to the turnaround of GM. I don’t comment as to the prospects for any specific company on this blog.

The turnaround that I am referring to is the encouraging signs out of Washington that, finally, sick companies are going to be treated with the same tough love that every Restructuring professional knows is key to saving the patient, assuming it is savable. The replacement of the GM CEO with one that espouses a restructuring plan that goes “deeper, harder, and faster” is encouraging.

Although I am hardly a fan of heavy governmental involvement in running businesses (Washington has hardly demonstrated it can run its own business well), I am at least encouraged to see what I hope is the end of bailouts to companies that then operate, more or less, with a mindset of business as usual.

Equally importantly, we are finally seeing evidence of dealing with both short term liquidity needs and longer term viability. Meeting the short term liquidity needs of a business is obviously important, but only if there is a sound plan demonstrating longer term viability.

I am increasingly convinced that as problematic as liquidity issues are, equally problematic is the inability of companies and their constituencies to get any comfort with long or even medium term viability. Most of us in the Restructuring profession grew up in the business fixing sick companies during relatively predictable market and economic scenarios.

Today, the Restructuring professional must deal not only with a sick patient, but also with a sick and seemingly unpredictable environment.

That squares, if not cubes, the difficulty of the turnaround.

Planning for uncertainty requires new skills, processes and paradigms. I have previously written about the thought provoking work of Dr. Paul Schoemaker in this area. Schoemaker not only believes company’s must plan for uncertainty, he goes a step further and argues that company’s can profit from uncertainty.

I have become a big believer that winners among the Restructuring advisors will be those firms developing an additional core competency around planning and managing in uncertain times. Hence, my desire to try to better understand Schoemaker’s work and that of his boutique consulting firm, Decision Strategies International ("DSI"). So, I carved out some quality time to meet in Philadelphia with Schoemaker and DSI CEO, Scott Snyder.

Coming next: One thought leader’s perspective on dealing with uncertainty. In my next post, I will share Dr. Schoemaker’s concept of a “Strategic Compass” for uncertain times.

Changing of the Guard

News out of San Francisco this week that the bankrupt estate has only been able to collect $8 of $77 million of Heller Ehrman receivables in the ninety days since their filing is likely to have a major impact on the competitive landscape of Restructuring practices at law firms across the country.

Let me connect the dots as to how see this event is likely to impact the competive landscape in the next ninety to one hundred twenty days.

My surmise is based on the lender blood I have in my veins from having been, early in my career, head of work-outs for a major bank (back before the upgrade to "special assets"...as if the borrower doesn't know where he is at with that nicer label). And, my surmise is reinforced by input I have gotten from the market.

There is a long history in lending of a bad result by a borrower or two in an industry quickly leading to changes in lending practices for the entire industry. With financial markets as skittish as they currently are, I fully expect that long pattern of quick adjustments to continue.

The collection rate on the Heller Ehrman receivables is dismal. (I am not commenting on the job being done by the Estate, I am commenting on the bottom line result.) Now, the rate is not necessarily out of line with what I expect from a law firm meltdown, especially in this type of economy. But, when compared to advance rates, implicit or explicit, that lenders have been using for law firm receivables, the result does not bode well for how lenders are likely to look at receivables risk with lines of credit of law firms, large or small. And, many of those lines of credit are coming up for review in the next sixty days.

So what is the lender to do who finds himself with a large line exposure, backed primarily…in essence…by receivables? The lender has to be careful less they trigger a meltdown, ala what is playing out in Philadelphia at Wolf Block. But, on the other hand, the lender can’t just ignore the problem in view of the current regulatory environment.

You can expect lenders to increasingly demand that partners back up the lines where the law firm is (relatively) heavily leveraged. Lenders have already begun asking for guaranties or sureties in cases where the firm is leveraged or a poor earner.

But, here is the real rub. The variance in the financial health of partners is immense. Some law firms might be surprised as to how many of their partners are insolvent on a balance sheet basis, especially in some of the states most deeply impacted by the downturn. While other partners have managed their personal affairs more conservatively and still have significant net worth’s.

So what happens when the lenders request updated financial statements of all those being asked to guarantee? How soon before lenders are routinely demanding joint and several sureties?

Woe be to the 45 year old Restructuring star who is at a financially leveraged firm and has managed his, or her, financial affairs conservatively.

No one wants to desert one’s partners in tough times…but no one but a fool wants to become the party to whom the lender is looking for a disproportionate share of the lender's risk mitigation.

I have already seen movement of Restructuring aces where these scenarios have been at work. You can expect to see much more movement. Like in the corporate world, those firms with pristine credit will have incredible opportunities (to attract top talent). Those firms with weak credit will quickly see their superstars bolting for the doors, before being asked to sign guaranties. And, they will bolt before the guaranties are requested, because -- once asked for -- the meltdown will be on. And, any Restructuring lawyer worth his salt knows full well that insiders are frequently at the mercy of aggressive trustees.

As this scenario plays out in the coming months, you can expect to see the changing of the guard.

New Restructuring market leaders will be emerging!

One year from now, you can expect to see Chambers listings of top Restructuring legal practices looking much different.

And, let us not forget that this phenomenon is not likely to be limited to law firms. All manner of professional service firms playing in the Restructuring arena will be impacted.

Change presents such great opportunities for the focused, the agile, and the speedy!

Want to understand more about the changing face of law firms, read the recently completed five part series, Law Firm Alert, which begins here. Do you have a friend that is at risk due to this scenario, share this post with him or her. They will be eternally grateful.

Wolf Block Closing

Monday's official announcement that venerable Philadelphia firm Wolf Block is closing is a sad exclamation point to my five part series on the importance of a robust Restructuring practices to full service firms.

My business career was launched in Philadelphia and I have long respected the firm and many of the fine lawyers of the firm. Like with the closing of San Francisco's Heller Ehrman, this closing is a clear warning shot that in this economy firms of all size are vulnerable, as discussed in the lead article in the just concluded five part series: Law Firm Alert.

I will leave to others to analyze all of the reasons for the demise of Wolf Block. As Gina Passerella of the Philadelphia Legal Intelligencer wrote, There Are No Easy Answers. But, it is worthy of note that Wolf Block was not listed as having a top rated Restructuring practice in Chambers. In other words, they did not have the strong engine that could help carry them through tough times.

Chambers has long recognized noted Wolf Block bankruptcy attorney Michael Temin as a Senior Statesman. However, their practice group is not rated. Now, Chambers' ratings are not perfect. But, I find them to be a relatively accurate barometer of market perception.

One fine bankruptcy attorney does not necessarily make a great Restructuring practice...a fact that many firms will, regretfully, soon see.

Have you taken my ten point test for law firms as to the likely success of your firm's Restructuring practice. The test will take you less than ten minutes to complete and will give you valuable insights into whether your practice will likely be one of the winner. The test starts here.

Winners in the Battle for Restructuring Legal Work - Part II

In the previous post, I identified five characteristics that I am seeing impacting which law firms are jumping out to an early lead in the battle to lead the way among bankruptcy and reorganization practice groups. Below is the second group of five.

Again, you can use the ten characteristics to score yourself, as well as a competitor(s), by using a ten point scale for each area. Of course, for the scoring to be of any value, you need to be honest about your own practice and objective about that of your competitor(s).

6. Aggressiveness of Pursuit of Niche Markets

The national legal market for bankruptcy, reorganization and restructuring services is very, very large. As such, it is comprised…like any large market…of many sub-markets, or niches. The winners will be those firms that proactively target worthwhile niches and aggressively pursue becoming the market leader in those niches. Changed market conditions are presenting all kinds of relatively new niches (e.g., Municipal Restructurings, purchased of toxic assets through innovative private/public “partners, “etc.) and those that penetrate new markets first (and serve them well) will be able to sell subsequent assignments based on their on-point experience in an industry, or with a certain kind of restructuring. Those who wait for the business to come to them are going to be disappointing their fellow partners and their managing partner. Disappoint big time!

7. Skilled at New Business Pursuit

Because of the speed and suddenness with which cases will close-up, the winners will have the discipline to be continually market focused (#5 from the previous post). And, they will hone their business development skills. The business is out there, but the competition will be as ferocious as ever seen. The survival of firms will (sometimes) be at issue. The winners will be using all the latest tools and techniques, the losers will be doing dinosaur dances to get new matters.

8. The New "Power Differentiator"

In a recent post geared to all types of Restructuring professionals, I wrote about how I see an emerging trend that client and matter selectivity will be a power differentiator. Investment bankers, consultants and lawyers, all need to be skilled at selecting the cases they will accept. All business is not good business. The key is to backstop aggressive marketing with very smart intake controls (including careful conflict analysis [desperate people will fight desperately]).

9. Provider of Great Service and Great Value

Winning new business is great. But, for that winning to really pay-off, the service after the sale must dazzle clients, and the other parties involved in the case (each of whom is a potential future business generator). I am amazed that in this economy there are restructuring attorneys who are frustrating their clients with their lack of responsiveness (seemingly not understanding that client communication expectations have changed since the last downturn due to technology changes).

And, great service is only half of the challenge. The winners will also dazzle with respect to value. They will understand how the client perceives value and will then be proactive in exceeding client expectations. The losers will milk the cases that they have out of fear they will not get additional cases, thereby creating a self-fulfilling situation. Show me a restructuring lawyer worried about his chargeable hours, and I will show you someone who will not be adequately focused on the cost/value being experienced by the client.

10. Focused, Agile, and Fast

In every industry, markets are changing rapidly. Any business using an old playbook is in deep trouble. These are unique times.

The winners in the legal restructuring market will, like in every market, be firms that are focused, agile, and fast. Focus is needed because the buying patterns and even the buyers are changing so quickly. Without focus, a practice group will miss emerging patterns of where the business is and how to best get the business. Agility is needed because of the speed at which matters will come to an end, submarkets will change, competition will change, etc. The winners will be those that are fast and that can adjust quickly. The losers will be those dinosaurs talking about cases they did ten and twenty years ago, or the way things were done in the last downturn.

* * * * *

Some of the ten characteristics have long defined the winners in the legal restructuring market. Some are new. Few firms will score well on each and every characteristic, but those that score well in most of the characteristics will enjoy the fruits of a strong market.

So how does your practice group score? And, how do you compare to your prime competitors? More importantly, what are you and your colleagues prepared to do to elevate your game?

For all but the few remaining bankruptcy boutiques, the quality of the performance of a law firm’s restructuring practice will have a very significant impact on the performance of the firm for the next three to five years. Full service law firms without strong restructuring practices are in for some tough, tough sledding. On the other hand, a great restructuring practice will enable a firm to rebuild their other practice groups for the very different economy that will emerge with the next upturn.

Lions and dinosaurs. Firm winners, and firm losers.

The choices are yours! Choose wisely!!

This concludes this five part series that started here. If you have a friend(s) practicing at a Restructuring legal group, you may want to share this series, which will either be comforting or a helpful wake-up call. I believe strongly that this country badly needs the entire Restructuring profession shining. Washington just does not have all the answers! Some might even question whether they have any of the answers.

Winners in the Battle for Restructuring Legal Work

No one has a crystal ball when it comes to this downturn. Every day, more and more of the "experts" are admitting that they have never seen anything like this before. I know that I haven't previously seen anything like this. Nevertheless, I do see emerging signs as to the likely characteristics of the winners in the battle for market leadership in the restructuring legal market.

Below are ten characteristics that I believe will be present in the winners. You can use these ten to score yourself, as well as a competitor(s), by using a ten point scale for each characteristic. Of course, for the scoring to be of any value, you need to be honest about your own practice and objective about that of your competitor(s).

Here are the first five, with the second group of five to be in the next and final post in this five part series:

1. Quality and Depth of Your Practice Group

A practice with a single star is never going to be a restructuring market leader in a major market. And yet, the practices at so many firms have just a single star. Truth be told, many stars just aren’t comfortable being surrounded by other stars (ouch!).

So just how good is your #2? Your #3? Of course, an easy answer to this question is to see how an objective evaluator like Chambers views your practice. It is easy to argue with individual ratings of Chambers, but overall I find that they do a very credible of rating leading bankruptcy lawyers. Score yourself well if you have a high percentage of your team highly ranked in Chambers.

2. Ability of Your Group to Operate as an Effective Team

Just as in sports, having a team of stars is only of value if the stars work well together. And, here is the Achilles heel for many talented restructuring legal teams. Many firms have stars that just don’t plain like and respect one another. They delude themselves into thinking that the dislike is not apparent to the market. Seldom is that the case! And, some firms sub-optimize their performance by putting up with one or more techno-bullies described so well by Seth Godin in his blog yesterday. The market, and these times, are just too damn difficult to prosper with a team that really doesn’t like working and winning together.

3. Extent of Leveraging of Other Firm Resources

Is your practice an island in your firm? Or, is your practice that gains leverage from the marketing efforts of others in the firm outside your practice group. And, do you return the favor by leveraging service through talent beyond your practice group. I am a big believer that life is a two way street. If you want to get, you first have to give. Is your practice a “giver” to other practice groups in the firm? Does your group regularly draw on other technical resources in the firm, or does your group more often do tasks that could be better done by lawyers outside your group in order to maximize chargeability of your group?

4. Extent of Leveraging of External Restructuring Resources

Winners leverage not only internally, but also externally. The winners have two way street relationships with the leading restructuring advisory firms, whether consulting or investment banking. These firms have an abundance of choices as to whom they refer into a situation and, not surprisingly, they direct their referrals to quality firms that have done well by them. Is your practice on the top of the referral list of the leading national and regional advisory firms? And, how active are you at referring these firms into cases, or helping them in other ways?

5. Continually Market Focused

One of the many changes in this market, in this downturn, is the speed with which cases end. For a variety of reasons, many cases go from very active to shutdown, in a heartbeat. The result is that the peaks and valleys of the rollercoaster of business are more severe. The winners will be those firms with the discipline to market continuously…even when they are full bore busy. Let’s be honest with ourselves, we all find the time to do the things we like to do. For example, even when we are very busy on client matters, we find the time to eat. Because many practioners don’t like marketing, they use client service as an excuse for not doing that which is critical. Winners have the discipline to do what is important. Losers have excuses.

So, how is your score at the midway point of this ten point list? (Give yourself a score from one to ten [ten high] for each of these points.) And, have you taken the time to score your leading competitor?

Coming next: This five part series concludes with a look at the remaining five characteristics of the winners in the battle for market leadership in the restructuring legal market. The series started here.

The Challenge for Law Firms with Restructuring Practices

Over the last three decades and a handful of economic downturns, law firms of all sizes have come to the realization that a good bankruptcy/restructuring practice provides countercyclical earnings protection. As a result, the legal market for bankruptcy/restructuring market has become very fragmented with many law firms having relatively small practice groups, at least relative to the size of their firms. For most medium and large size firms, the practice groups have evolved to be a size that they could offset a slowdown in traditional downturns.

The meltdown we are experiencing today in this country, and in fact around the world, is obviously not a traditional downturn. It will be deeper and it will last longer (as I predicted some five months ago in a series on my Prospering in Tough Times blog, Why the Recession will Be Deeper and Longer than Expected).

Law firm managing partners with restructuring practices are likely to soon be very disappointed with the ability of their restructuring practices to offset the downturns in other practice areas. Through no fault of their restructuring practices, the downturn in demand in other practice areas is so great that it is unrealistic for restructuring practices to be a complete offset. BUT, something for which restructuring practices are likely to be taken to task is their inability to grow the market share of their practices amidst the greatest market opportunity in many decades.

The challenge for leaders of restructuring practices is that the market, albeit larger, is very, very different than in past downturns. (This is the case beyond just law firms.) The nature of assignments has changed. Buying patterns have changed. And, practice economics have changed.

Woe be to the restructuring practice leader that has merely dusted off his or her playbook from the last downturn.

And, even more woe to the law firm managing partner lulled to sleep (really to “inaction” as I don’t know many law firm managing partners sleeping well these days) by the thought that he, or she, has a restructuring practice that will be effective at capturing a fair share of this very different market.

Like in other segments of the restructuring profession, the law firm market is quickly becoming a two tier market. A handful of firms understand the new market dynamics and are building their practices to capture high market share in the changed market. The rest are growing modestly, but are largely just waiting for the boom times to come. They wait with their old playbook on their desk. In some cases they wait with a higher ratio of dinosaurs than of lions eager to get after capturing the new market segments. And, in almost all cases they spend a fair amount of time putting on their game face so they can...with a straight face... tell others that “we are busy.”

For practice area leaders at firms which fully understand the new dynamics of the restructuring market place, these truly are the best of times.

For practice area leaders who don’t understand the new dynamics, they will quickly come to understand that merely being personally busy will not earn them the respect or the big bucks from their partners. In fact, given that ours is a society that likes to put fingers at others, I expect that many restructuring practice area leaders will soon be the target of scorn (or worse) from their colleagues who will not understand why their restructuring practice is not growing dramatically and generating spillover work for other practice areas.

Fear not, soon a headhunter will be calling as the musical chairs of practice area leaders accelerates fueled by managing partners looking for an easy solution to the problems with their restructuring practice and by headhunters benefiting from churn. In fact, I fully expect that we will see an individual or two who does a three-peat, i.e., practices at three different firms within this downturn in an effort to stay one step ahead of the word getting around that they play the game with an out-of-date playbook.

These are such interesting times! Change provides such great opportunities for those that understand it, embrace it, and act on it.

Coming next: This five part series concludes with a look at the likely characteristics of the winners in the battle for market leadership in the restructuring legal market. The series started here.

The Challenge for Law Firms without Restructuring Practices

The challenges facing law firms across the country, of every size and shape, are well documented. We have seen a couple of the giants close their doors. Fine firms are laying off attorneys in numbers unlike anything seen in many decades, if ever. And, many firms are beginning to feel significant financial stress.

The reasons for these difficulties are well known. Law firms are being impacted by the same ripple effect of the recession, which is impacting all kinds of other businesses. Clients are being lost to businesses closing. Collection problems and the resulting bad debt expense are increasing. And, clients are pushing back on pricing, and are delaying work wherever possible.

Then there are the industry specific problems. Transactional work of all types has plummeted as the overall lack of liquidity makes transactions difficult, if not impossible, to finance. Disputes are being settled more quickly by parties that can't afford protracted litigation. And foreign investment and the resulting cross border transactional work has slowed dramatically.

When dispute resolution and traditional transactional work slow dramatically,

most business oriented law firms are going to feel pain. And, most have begun to feel real pain!

I am pleased to see that most are also reacting quickly by making the cuts in staffing levels and expenses that other businesses are making.

The problem is that seldom is just cutting the solution for any business. Cost cutting is an important tool for skilled managers, but ultimately success comes from growing one's business. And, that is what has almost every managing partner without a restructuring practice looking at getting into that practice area by recruiting a restructuring pro.

The challenge for managing partners is that the restructuring market for law firms has changed dramatically from the last downturn. The nature of the business and the sources of the business have changed from historical patterns. And, perhaps most importantly, the leverage for other practice areas has changed.

Compounding the challenge for the managing partner of a law firm without a restructuring practice is the fact that there are many fine bankruptcy attorneys; the number of restructuring practice builders is a small subset of that number. And, supply and demand has driven up the cost dramatically of attracting a restructuring pro, many of whom would only come to a firm without a practice if they can bring a couple of supporting attorneys. In a major city, the cost of entering the restructuring market can easily require a seven figure investment. And in NYC, Chicago or Los Angeles, one can easily be looking at a multiple seven figure investment!

Here is the real rub. That kind of investment may well buy a dinosaur or two. There are fine bankruptcy lawyers who are having difficulty keeping themselves busy…truth be known…in these changed markets. Woe be to the managing partner who chooses wrong. And, woe be to the bankruptcy attorney who accepts the gold but doesn’t have a solid understanding of the new dynamics of the business. Or if he (or she) does have the requisite understanding, he lands at a firm where the slide to dissolution is so far along that no restructuring practice could develop and prosper in such a firm. “Saviors” that don’t save can well see their reputations trashed in this day and age where law firm failures are so often accompanied by a ton of very public negative publicity.

Never before has there been a greater need for skilled due diligence, on both sides. The challenge is succesfully doing such diligence when the subject matters lies beyond one's expertise.

Coming next: This five part series continues with a look at the second scenario, law firms that currently have a restructuring practice. The series started here.

Law Firm Alert

With each passing day, it becomes ever more apparent that law firms without the right practice area balance are headed for tough, tough times, if not outright failure in some cases.

Most law firms have spent many years fine tuning the composition of their practice areas, as well as of their geographic locations. Unfortunately for most firms, the assumptions under which such fine tuning occurred are now trash. Many formerly attractive practice areas are now of little value. Similarly, many formerly attractive geographic locations are now of little value. And, if the practice area and location mix were not enough of a problem, many firms have capital structures that reflect the overleveraged scenario that so many companies and individuals are now working through.

You know the world has changed when you see some law firms admitting partners primarily so that they can build their capital base. Yes you read correctly; I am seeing firms giving lawyers they de-equitized in good times the “wonderful” opportunity to now become an equity partner…if they will just write a sizable check or sign a large promissory note. My how the world has changed!

Although much of my work for law firms has long been on strategic portfolio balance issues, this blog is focused on restructuring. So, I want to address the issue of the importance of a law firm's restructuring practice to its financial health. And, I want to do so at a level of detail such that this will be a four part series.

Now, even the most casual observer of law firm management knows that having a restructuring practice is beneficial at a time when the economy is down. It is even more important to have one in the free fall we are currently experiencing in this country. But, a more careful analysis would highlight that many law firms with seemingly good restructuring practices are still experiencing problems. How and why this is the case is among the issues to be addressed in this four part series.

The potential importance of having a primo restructuring practice has not gone unnoticed by the attorney recruiters who are matchmaking like busy bees. Even mediocre restructuring practice builders are being inundated with calls. (Note, I did not say mediocre restructuring attorneys but instead mediocre practice builders.) Tragically, many law firm managing partners are ill equipped to know who are today's restructuring lions as opposed to restructuring dinosaurs that have seen their best days.

One wrong "bet the ranch bet" on a new restructuring practice area leader could easily become the final nail in the coffin for a law firm.

And, for the restructuring attorney that accepts the golden offer from a desperate firm, they could easily find their reputation dragged through the mud of an ugly law firm dissolution (and they are getting uglier almost by the day). In the finger pointing that goes on in today’s dissolutions, not even the best attorney is immune from getting shot at in the cross fire of dissolution.

So much is at stake, both for law firms and for restructuring attorneys. The waters are shark infested. None of us have a crystal ball. Few of us even have a map reflecting the current environment. So much has changed, and is changing. It truly is a whole new world!

Coming next: We begin our look at three different law firm scenarios with a look at law firms that don’t currently have a restructuring practice.

Brain Surgeons, Coroners & Undertakers

As I continue to get data points from the field as to what is really happening in the Restructuring market, I am developing a picture of a three tier market - in each and every one of the types of "restructuring" professionals (i.e., among lawyers, consultants and financial advisors).

Based on what I see in the field, there are a lot of professionals that...truth be told...are working on liquidations. To me, doing this work is kind of like doing the work of an undertaker. Work that is important to our society, but hardly is a part of shaping the better future we all so need.

There are also a lot of professionals working on forensic analysis. Where did all those billions go...and not just from the Madoff style out-and-out fraudsters? This work kind of reminds me of the work of coroners. Work that is important because by learning how and why the patient died, society hopefully learns the mistakes to avoid in the future. These lessons can have value. And, so too can recoveries from the wrongdoers (although I believe these will generally be for a net recovery of pennies on the dollar in our current downturn). Society certainly benefits more than just shoveling dirt over the body.

And, then there are a relatively smaller group of professionals who are making serious efforts to transform companies and industries. Kind of reminds me of the work of brain surgeons. Tough, tough stuff! One wrong move and the patient can die. (Coroners and undertakers are not known to kill patients). One or two right moves and the patient not only lives, but hopefully becomes a productive part of our future. The benefit to society is significant.

Just between you and me,

what is your practice really about? Is your current role the best use of your talent? Is your current firm the best platform from which to practice your craft?

Oh...for those readers who like to be well paid for the vocational effort they expend, any idea who makes the best money of these three vocations; the brain surgeon, the coroner, or the undertaker?

In thinking through that question relative to the Restructuring profession, don't forget that the true transformational advisor...whether legal, operational, or financial...is creating a potential long term client.

The law of supply & demand, and the fundamentals of value creation have brain surgeons and transformational restructuring professionals pulling down the big bucks, having the most rewarding careers, etc.

These times are so interesting!

PS One of the most dangerous career moves, in any line of work, is to put yourself in a vocation at which you are not really good. Much better to be a top coroner than an incompetent brain surgeon! And, a top coroner...or even a top undertaker...who knows how to leverage himself (or herself) with "juniors" can certainly make some very nice money.

Restructuring Municipalities

As the ripple effect of the meltdown spreads, state and local governmental entities are hardly immune from the financial squeeze. At the state level, California's financial problems have gotten the most press. But, every state is being impacted heavily, just at different speeds. And, local entities are the next ripple.

Counties, cities, towns and all kinds of special governmental entities are caught in a vicious squeeze. The one-two punch of reduced valuations on residential property and now on commercial properties is decimating the tax base. Unpaid taxes are increasing as properties are abandoned. Federal and state support is getting cut back (notwithstanding the impact of the Stimulus program for some entities). And, user fees are declining as both companies and individuals are more judicious about their spending, even for necessities such as water.

At the same time, demand for free services/assistance is increasing what with a population severely impacted by job losses, home equity losses, and investment losses.

Governmental entities of all kind have, like much of America, had a mind set of ever increasing revenue funding ever increasing spending. Those days are over! And, in my opinion, not just over in the near term.

Just like corporate America needs effective restructuring assistance, so too does the municipal world.

But just like the corporate world, many municipal entities will regrettably seek help too late to effectively utilize the full panoply of restructuring alternatives. Regrettably there will be more bankruptcy filings, ala that of Vallejo, a Northern California city that filled bankruptcy in May of last year.

When municipal entities do start reaching out for help...and they will, who will be the market leaders in serving this unique subset of the restructuring market? Which law firms will lead the way? The traditional leaders in restructuring, or the leaders in municipal finance, or innovative combinations of these two highly specialized areas?

Likewise with consulting/advisory firms. Who will lead the way?

The market is wide open. This area is such a great opportunity for firms to establish preemptive market leadership. Who will do so? Too early to identify the firms, per se, but the leaders will undoubtedly be firms that:

1. Understand and fully appreciate the legal and operational differences between a corporate restructuring and that of a municipal entity,

2. Are skilled at negotiating between constituencies with very different interests (without using the hammer of "well we will just put you out of business."),

3. Are comfortable with the transparency that comes with a restructuring in the municipal world,

4. Are able to create appropriate urgency in an environment that generally moves at a much slower pace than the corporate world,

5. Are adept at operating in a political environment, and

6. Are skilled in navigating the sometimes tricky waters of governmental procurement.

As with my recent post about nonprofit restructuring needs, let there be no joy in Mudville at yet another support structure of our society being devastated by this economic meltdown. The cutbacks in government services that will be part of successful restructurings will impact all of us. As such, let us all hope that some of the best minds in the Restructuring profession are attracted to this market opportunity.

Let Us Not Forget the Non Profits that so Need Restructuring

As Restructuring professionals, we can never forget that the long term health of a Restructuring business is dependent on a good economy. Oh sure, there are deluxe profits to be made in dealing with the meltdown that is currently occurring. But, if one cares at all about humanity, one cannot have any joy about the prospects of another 3-5 years of the kind of misery that is evolving. It is not joyous to see people losing their homes, retirement accounts being decimated, etc., etc.

The pain in the streets of America is severe and getting worse.

Part of the pain that I see playing out is the terrible squeeze on our non-profit sector which plays such an important role in supporting the needs of our society that are not adequately addressed by governmental programs.

Non-profits have had their endowments crushed by the stock market declines. Private sector giving, at both the corporate and personal level, is declining. Governmental support is being quickly reduced. And, all this at a time that demand for assistance is climbing rapidly.

As an industry poised to benefit from the downturn will the Restructuring profession lead the way in supporting our non-profits? Or will the profession, by and large, be focused on maximizing personal wealth and then hoarding that wealth?

All of us need to consider how we can help these organizations. Beyond money, more than ever they will need volunteer labor. And, these organizations will also need talent that can help them restructure, and do so quickly.

This is just another area where the Restructuring profession can be instrumental in making a difference. But, will they?

Capitalizing on Uncertainty

Everywhere we turn, uncertainty reigns. In the capital markets. In executive suites. In the work force. And, even in our government.

Few if any of us have seen anything like this current environment before.

Just as with the horrific tragedy of 9/11, none of us had seen anything like that before.

Turning around troubled companies has always been difficult. Turning around a troubled company in the midst of a sliding economy is difficulty squared. And,

turning around a troubled company in the midst of a sliding economy which in turn is at a time of unprecedented uncertainty is difficulty cubed.

Perhaps it is the optimist in me, but I believe that there will be companies and individuals prospering in these times. In fact, I write regularly on that belief in my Prospering in Tough Times blog.

Recently, I had a chance encounter with an individual who has a long history of helping companies deal with uncertainty. The one hour discussion I had with this man, Paul J. H. Schoemaker, Ph.D., brought my beliefs about what is possible to new levels.

Shortly after 9/11, Schoemaker wrote a book, Profiting from Uncertainty, Strategies for Succeeding No Matter What the Future Brings. After spending the hour with Paul Schoemaker, I ordered the book and quickly devoured it.

This book should be required reading for any Restructuring professional. It is that good. (You can read my review here on Amazon.)

No, Paul Schoemaker is not a long time friend...or a client...or a family member. He is just an example of the kind of exceptional wisdom that this country...and specifically the Restructuring profession that I am hoping will lead the way...needs to absorb.

The times may be unlike anything we have ever seen before. But, there are professionals, among our midst, who have pieces of the puzzle for righting this ship. This country...in fact the world....needs that wisdom to be shared. No one person...no one firm...has a corner on the universe of wisdom needed to turnaround this economy in something less than 3-5 years. 3-5 years of hell!

With each day of missteps coming out of Washington, I am more and more convinced that this turnaround will come from the "field," and the speed of the turnaround will be heavily influenced by how quickly the Restructuring profession absorbs the need for new business models, new approaches, new thinking, etc.

The Future of Retailing

This is the third and concluding post in the TMA Webinar on Retailing held last Wednesday (2/18)/ The three part series starts here.

In this post, I hope to stretch the thinking of readers as to the need for business models to change in most industries, including retailing.

Now, I don't consider myself a retail expert. Early in my career, I was the bank workout specialist on a very large regional grocery store chain and on a national specialty retailer. Then, during my years with Coopers, I served as CRO for a couple of large regional retailers. And, I have enjoyed a twenty five year client relationship with a major retailer. But, even with (all) that, I consider myself an informed observer, not an expert.

My retail exposure has, however, brought me into contact with some amazing retail executives. A couple that come immediately to mind are Jeff Holczer who I consider to be one of the sharpest retail CFO's, and Marvin Shapanka who has a rare combination of deep, traditional merchandising experience and deep experience in internet retailing. I am always pushing Jeff, Marvin and other retailing execs that I know as to their thoughts on how retail needs to fundamentally change in view of the present economy.

In the interest of stirring up the pot as to the need for fundamental change in business models, let me suggest six changes that every retailer should be carefully considering:

1. “Own” your customers. Reinvigorate a focus on customer loyalty by applying best practices being successfully used in other industries.

2. Take advantage of the shift in the labor market to get higher quality store personnel and dramatically increase the expectations as to their performance in providing great service to customers.

3. Fully leverage the company’s internet retailing presence by following an aggressive cross channel strategy, with respect to marketing and sale of goods.

4. Rethink store design and store location so as to increase real estate efficiency. Aggressively pursue getting all stores to (current) market rate leases, for the right size stores, in the right locations.

5. Rethink the inventory investment levels in a store and make better use of internet option (and fulfillment center) for slower moving items, so as to increase inventory efficiency.

6. Rethink the role of the CFO in an environment where uncertainty is likely to reign supreme for the foreseeable future, where the efficiency of capital usage will be more important than ever, where deflation will likely be more of a factor, and where operational efficiency will be key to creating competitive advantage.

Now, those of you with retail experience can undoubtedly add to my list. But, here is my point: how many Restructuring consultants are focusing their retail clients on these kind of fundamental issues, not just on slashing expenses.

I am big believer in aggressively cutting expenses in view of rapid declines in revenue. But, what Restructuring consultant worth his or her weight can't do that...almost in their sleep. The real test is how many consultants can also show their clients how to increase market share of the business that does exist out there in a given market segment?

The bottom line is that lenders and investors are not being kind to any business that does not have a compelling value proposition. Seldom will just tinkering convert an average company into one with the requisite compelling value proposition. What an opportunity for Restructuring consultants with insights into the necessary business model changes in a given industry!

Takeaways from TMA Webinar - Retail 2009

In my last blog post, I provided an overview of this TMA webinar. In this post, I want to list my major takeaways from the presentation by the panel:

1. The future for retailers lacking a compelling value proposition is very bleak. One of the panel members (it wasn't easy to follow who specifically was speaking) said the ultimate test is "if your store/brand went away, would people even care?"
2. Cash is king (in this and every other segment of the economy). Presume that this downturn will last years...do rigorous scenario planning...and stress test to understand under what scenarios cash runs out.
3. Plan for the worst (and be pleasantly surprised if things get better anytime soon).
4. Every retailer needs to be using a food retailer's mentality...watch the pennies. One of the panelists went so far as to suggest that C-level executives with this kind of mentality and experience would be welcome in forms of retailing that have not operated like this in the past.
5. Look to renegotiate leases and all other contracts. Challenge is how to do so when bankruptcy is not imminent???
6. If bankruptcy becomes the necessary option, get started with planning early. Obviously, nothing new about this very appropriate advice.

Running throughout all of the commentary was the notion that nobody really knows what to use as a base planning scenario. The combination of this uncertainty plus the distress makes every retailing situation extremely challenging.

I really admire the panel. Tough subject under any circumstances, and certainly challenging to condense into one hour. To a person, they did a fine job and my concise summary of takeaways does not do full justice to the thoughtfulness of their presentation.

My one surprise was that I did not come away from the presentation sensing that any of the panelists were championing the need for fundamental changes in the business model for retailers. I am a strong believer that:

virtually every industry will end up with fundamental changes in business model as a result of the severity and duration of this downturn.

Not only is that my expectation, but it is also my hope as I believe that such changes are critical to the United States regaining some of its competitive advantages.

Restructuring the business models of our many industries represents great opportunities for restructuring consultants with deep industry expertise and a commitment to avoid being blinded by all their years of experience in how an industry has traditionally operated. From the restructuring of business models comes the opportunity to create a compelling value proposition.

As opposed to the liquidations that have become the norm in the retail industry, a comprehensive restructuring provides an opportunity for skilled legal counsel to add value by facilitating the restructuring, and for skilled financial advisors to arrange appropriate financing for the restructured business.

Up Next: To stimulate the kind of thinking I believe needs to be done in every industry, I am going to suggest some things that I fully expect that the best of the Restructuring advisors will be working on with their retailing clients...or at least those retailers committed to prospering even in the down times. My post on The Future of Retailing follows here.

TMA Webinar - Retail 2009: Is There a Light at the End of the Tunnel?

Today, I participated in TMA's webinar on the state of the retail industry.

Peter Schaeffer, from Carl Marks Advisory Group, assembled a quality panel consisting of:

Jeff Bloomberg from Gordon Brothers

Burt Feinberg from CIT Retail Finance

Jay Indyke from Cooley Goward and Kronish

Jeff Perlman from LNK Partners

It would have been great to have an operating retail executive or two, although clearly this is almost impossible given what retailers are facing in their own company. Not exactly a time to be out speaking, and a tough time to be gratuitously candid, especially if an officer of a public retail company.

Given the state of the retail industry, the state of the economy, and the tremendous general uncertainties of these times, I thought the panel did a very credible job. Add in the fact that panel presentations always have the issue of what exactly is the audience (experts or relative novices) and I, for one, appreciate what these five Restructuring professionals served up today.

Sometimes the real utility of a program like today's is not what, per se, the speakers convey but ones own take when given the opportunity to focus on the subject matter and mentally challenge that which is being said.

In my next post, I will report on my specific takeaways from the presentation. In the meantime, I can definitively say that although each of these pros believe better days will come for retail, every one of them is very clear that they are as clueless as all of us as to when that will happen. In fact, my take of their position as to the Webinar subject question is that

all five believe there will eventually be light at the end of the tunnel, but not one of the panelists reported seeing the light yet.

Buckle in...it is going to be a long and very bumpy ride!

Up Next: In my next blog post, I will summarize my specific takeaways from this webinar.

Dinosaur Speak

I am a strong believer that what we are experiencing in this downturn is unlike anything most of us have seen before. Comparing it to the last two or three downturns can confuse rather than enlighten.

Recently I read a column where a well known columnist suggested this wasn't really that bad a downturn because the "misery index" was much lower than in other downturns. Now as you may recall, the so called "misery index" is the sum of the inflation rate and the unemployment rate. With our current misery index at less than 10 and half of what we had in the downturn of the early 80's, he concluded things really aren't that bad.

So let me get this right. As unemployment rises, but deflation roots and even accelerates, we really will not be in trouble because the misery index will be relatively low???

That is an example of dinosaur speak. Thinking and talking about concepts relevant in another era. Concepts with virtually no relevance to the challenges of today.

Is your counsel to client filled with dinosaur speak?

Is your Restructuring practice plan filled with dinosaur speak?

This downturn is unique. The successful restructuring professionals will be those that see things as they are, as opposed to trying to shoehorn this mess into how they remember past downturns.

Separating the Truth from the BS

By now, all manner of Restructuring professionals are expected to be having more business than they can handle. After all, we are experiencing the worst economic meltdown in decades.

So, everywhere one turns you hear about how well a given restructuring practice is doing. You probably have heard the conversation, or even been a part of one, that goes something like this:

Sam (a hypothetical restructuring attorney): "So Bill how are things going?"

Bill (a hypothetical restructuring consultant): "Gee, Sam these are interesting times. You busy."

Sam: "For sure."

Bill: "Yea, I know the feeling."

Sam: "Want to have lunch?"

Bill: "Sure, I can do it any day next week."

Why do I have the feeling that the truth is that a handful of firms are very, very busy, while most others have yet to come close to operating at capacity? And even those practices that are operating at close to capacity are not throwing off the collateral work to come close to carrying the rest of their firms.

Of course, every professional wants to portray the image of being very busy. Obviously, being less than very busy during such a meltdown would have others wondering about your proficiency.

But,

proficiency...alone...is not determining how busy a given firm is. Practice strategy and strategy implementation are having, as they always do, a major impact.

The buying patterns are very, very different in this downturn, at least so far. Practices marching to their playbook from 2000-2001 downturn, or from that in the early '90's, are likely to be sub-optimizing their performance relative to their talent. Truth be told!

There will be some huge winners among professional service firms in this extended downturn. And most competent restructuring professionals...whether attorney, consultant or investment banker...will do better than they have done in recent years. But, many practices will end up disappointing Managing Partners looking for the Restructuring practices to carry their firms in these challenging times.

Is your practice positioned to be among the winners in this new world?

Worlds Toughest Turnaround

Regular readers of this blog know that I believe that turning around a troubled company is tough stuff. Very, very tough! Even in good times, a turnaround is tough; and in an economy like that which exists today, a true turnaround is like a 1 in 100 shot.

Now my handicapping may seem a bit extreme, but consider the rate at which creditors are preferring some form of liquidation over supporting a turnaround. The high number of liquidations would suggest that my number may not be as far out of line as at first it may seem.

But, the post is not really about general turnaround odds. I was using my opening statements to set the table for the fact that we are now watching the mother of turnarounds...that of the economy of the United States.

We have all heard the analogy of how difficult it is to quickly turnaound a battleship (i.e., a big company). Well, just imagine how difficult it is to turnaround the world's largest aircraft carrier (i.e., this country's economy), and do so in the worst weather ever experienced (i.e, a global recession).

And imagine the turnaround needs to be accomplished with the most self centered set of constituents (i.e., the House and the Senate) at the table. Many of whom are playing Russian roulette as the bigger game is played out.

It is no wonder that this turnaround isn't going well. And, make no mistake about it, this turnaround is not going well. On my Prospering in Tough Times blog, I wrote about the snowball effect back in October. Here we are , four months later, and the snowball hasn't slowed one iota. (I get no comfort that the mess might have been even worse if some things had not been done, as some would have you believe.)

Although the downturn has been a boon for Restructuring professionals,

I hope that no one in this profession is under any false delusions that continued lack of progress on stopping this slide is a good thing.

Restructuring professionals need to be doing all they can to get the word to Washington that the time has come to stop doing business as usual.

Even if Washington begins to quickly slow the snowball, we are looking at a protracted downturn. No turnaround is ever instantaneous, and this is the mother of all turnarounds. We will be witnessing many friends and relatives losing their jobs, their homes and their life savings, before this turnaround occurs.

Let there be no joy in Mudville that good times are back for the Restructuring profession. If we are part of a true profession, then the profession must do its part to let Washington know that turnarounds require swift, skilled action. And, we must also let Washington know that we need more of our elected officials to be true patriots who put the interests of the country above personal needs to grandstand for their constituents.

Tranche Warfare - Who Will Be the Experts?

Remember the days of old when debt when most Restructuring cases involved relatively simple capital structures. Obviously, those days are long gone.

Over the last decade, through the growth in securitization and in trading of risk layers, many troubled companies now have complex capital structures and even more complex debt ownership issues.

Welcome to the era of tranche warfare, where the combination of contractual legal rights, bankruptcy law, and debt holder negotiating skill will determine the winners and losers in a given battle.

Although the majority of the early wars have been occurring in real estate matters (one example of which is well described in a recent Wall Street Journal article regarding the John Hancock Tower in Boston), versions of tranche warfare will also be playing out in non real estate distressed situations.

So here is the relevant question for this blog:

who are the professionals who will quickly carve out a name for themselves as being the best at tranche warfare?

Will this be exclusively the turf of lawyers, or will some investment bankers become the "go to" resource for holders of paper?

Fortunes will be made...and lost...playing the high stakes game of tranche warfare. Professional reputations will be made...and presumably lost...in these high stakes games.

Certainly not your father's Oldsmobile.

Change represents such great opportunities for the astute, who are also agile.

The Current Buy Sell Gap in Distressed Assets

I recently spent time in Vegas (at the TMA Distressed Investment Conference covered in earlier posts) and in South Florida. In both locations, I continue to marvel at the "trophy" properties sitting empty or near empty, and to think about how these distressed assets....and many more across the country...will get worked out. And, even more importantly for this blog, which professionals will take the lead in getting these assets worked out.

My sense is that there is still a significant gap between what most savvy distressed investors are willing to pay and what most sellers are willing to accept. The latter seem to still be thinking about ranges of discounts from what they have invested. Some potential buyers are excited about big discounts from recent investment levels, but the savvy ones understand discounted cash flow ("DCF") and are basing their decisions on DCF analysis.

If one assumes that this downturn will be long, DCF analysis gets interesting. If an asset (real estate or operating company) is likely to generate negative cash flow until the overall economy turns up (say three or four years), then the DCF for many distressed assets will be amazingly close to zero...or in some cases even less than zero...because of the way that DCF weighs the earliest years! Less than zero DCF suggests, of course, that the lender should pay the buyer just to be freed up from carrying cost burden. Ouch!!!

A trophy that cost a billion dollars within the last year or two, now could well really be worth close to nothing. Now there is a huge discount!

Most lenders and investors are not going to be able to take the accounting impacts of such reality on very many assets, any too quickly, less they expose just how precarious their own financial position is.

So, for the near term, we are likely to see a whole lot of dancing going on between potential buyers and potential sellers, with relatively few deals consummated.

But, this is not some investment advisory letter...my focus is on the Restructuring process and who will be the firms that read best this new playing field and position themselves to be market leaders for these very different times.

Change presents such great opportunities for those who shed the blinders of what has worked well in past downturns and fashion winning strategies for this downturn.

The New Power Differentiator

I make no bones about the fact that I am an unabashed believer in the power of market leadership for professional service firms (as well as for all kinds of other companies). Good things happen to market leaders, and dog crap happens to those who are not.

Market leaders attract the best clients, the best professionals, and are able to charge the best rates. And, most people prefer to associate with winners, rather than with also rans. Because of the many benefits of market leadership, attaining and maintaining market leadership is worth the considerable effort needed to make it happen.

Since clients hire me to help them build sustainable market leaders, I am continuously looking for the latest trends that can impact market leadership in a given market segment. As you can read in the postings on this blog, I am seeing a ton of changes occurring in the Restructuring world that will impact what makes a given professional service firm a market leader.

I see an emerging trend that client and matter selectivity will be a power differentiator. The kind of differentiator that can contribute to market leadership. Now, client and matter selectivity has always been important. But, I am increasingly convinced that such selectivity will be a top five contributor to attaining and maintaining market leadership for lawyers, turnaround firms, investment bankers, etc.

With so many cases being played out on the “liquidate and litigate” format, opportunities abound for all kinds of professionals to have a case turn into a financial DISASTER.

Note that is "DISASTER" with capital letters!

Equally importantly, financial disaster will often be accompanies by reputational damage.

Those who will be market leaders for the (long) duration of this downturn will be firms who (1) are able to instill in their partners the importance of this issue, and (2) put in place the processes to safeguard against a front line partner being negligent in their assessment of the financial prospects of the case.

Interestingly...assessing payment probabilities becomes as important as one's substantive expertise.

Some will say that this is nothing new. I would suggest that assessing probabilities has gotten a whole lot tougher at a time when many of us are having difficulty seeing clearly because of the mind numbing pace of change. And, never has there been more pressure on front line partners to bring in business.

Opportunities abound for failed judgments with million dollar+ consequences.

In the words of that famous Disney tune from Aladdin, it is a "Whole New World."

Distressed Investment Capital Head Fakes

All of us want to believe that there is an ample supply of capital available to invest in distressed assets, particularly for those situations which offer excellent potential returns for savvy distressed investors. And, there have certainly been deal professionals and articles suggesting that such capital is available, even if not as plentiful as in years gone by. But,

Is capital really available for distressed situations at this time?

Based on my work behind the scenes with leading professional service firms involved in the Restructuring world, I believe that such capital is much less available than the noise would have us believe.

Sure, there are funds that have raised large amounts for investment in distressed. But, my sense is that most of these investors are keeping their powder dry while they wait for what they perceive as something closer to the bottom of the downturn. A good example of such investors are the two that were the subject of my post Sage Advice from Two Investment Pro's.

Some of these investors also have investments in previous funds that will be where they will want to deploy some of the new money (subject to fund limitations on these types of transactions).

Let me make clear that there are certainly occasional distressed deals being done by courageous investors. But, the number being made has been considerably less than the buzz as to available funding for distressed.

So where has all of the buzz come from? You know, as well as I do, that the buzz has come from representatives from all manner of financial entities who have been out in the market saying their entity was definitely interested in doing deals. The skeptic in me has believed that increasingly, over the last six months, such claims have been more efforts to keep one's pipeline of potential deals full rather than true interest in consummating a current transaction.

I am not suggesting these reps were lying. I do think that, at minimum, there was a big gap between what they may have personally believed and institutional reality.

Well, the tide is turning. Over the last couple of months, more and more of these reps have been terminated - a clear sign that their employer is not looking for deal flow now, or even in the near term future. As bad as I personally feel about some of the quality professionals being laid off, I do feel good that the head fakes as to capital availability will be reduced.

Turning around a troubled company is difficult enough, especially in these challenging times. There is no time to be chasing solutions that are not real.

As sure as morning follows night, the appetite for quality distressed investments will increase. But, such increase will not likely occur quick enough to be a silver bullet for most current distressed situations.

That is not all bad for Restructuring professionals. The true pro's will have to use all their creativity to find solutions absent a silver bullet. Woe be to the novices, especially those who don't read head fakes well.

Takeaways from TMA's Distressed Investing Conference in Vegas

This two day conference was rich with takeaways for me. Some of the takeaways were confirmation of some hypothesis with which I have been working. Some generated new thoughts.

Here are my prime takeaways (some of which will be the subject of deeper commentary in the coming weeks):

1) We are in for a protracted downturn, one measured in years not months,

2) There is presently a dearth of capital for distressed situations, notwithstanding some sources talking up their interest,

3) Because of #2, for the foreseeable future “hostage financing” will be the best source of capital, notwithstanding the desire of these capital sources to exit,

4) Because of the complex capital structures that have evolved because of syndicating and parsing the risk levels, tranche warfare will be the name of the game in many situations,

5) Valuations will play an important role in the tranche warfare, at a time when valuations are more difficult than any time in my memory,

6) Companies without compelling business models and/or market leadership positions will often be quickly liquidated (as in gone forever, not just sold in a 363 sale),

7) There is much more focus on expense reduction rather taking revenue from competitors (some smart consulting firm is going to start going after this opportunity),

8) Constituencies are not going to stand by and watch professionals run up big fees where constituencies are getting creamed, and

9) Many in the profession are looking for a redo of past patterns, some others are recognizing that the changed circumstances call for new methods and processes of restructuring.

My overarching observation is that all the change represents great opportunities for firms…whether law firms, turnaround firms, or investment banking firms…that are willing to truly embrace the changes that are occurring. I am expecting that we will see some new market leaders emerge over the next couple of years.

Sage Advice from Some Distressed Investment Pro's

Day #2 of the TMA Distressed Investment Conference was as worthwhile as the first day. Lots of good data points, topped off by some sage advice from some distressed investment pro's. I will get to that advice after a brief overview of some of the other high points.

Today, there were two excellent presentations, one on "Where Will the Opportunities Be", the other on "Trends in DIP Financing." As to the former, my own take has been that opportunities will be available in every single industry, and in every size company. Investors should focus on what they know best so they are able to make the most of the opportunities that will abound. The panel’s comments deepened my hypothesis that the opportunities will be everywhere.

As to “Trends in DIP Financing," notwithstanding glimmers of hope from the panelists, for all intents, I see the DIP market as being largely non-existent, at this time. I have trouble envisioning any financial institution committing sizable dollars to this market given the pressure on the institutions to deleverage and to reduce their risk exposure. The best source of DIP financing will likely be existing creditors. But, capital markets can change quickly and this is a niche market every turnaround professional will want to watch very closely.

The highlight of Day #2, for me, was a terrific panel of seasoned pro's in distressed investing. Their insights on what experienced capital was doing at this time made the entire Conference worthwhile to me. My perception has been that those who had recently raised capital to invest in distressed were largely sitting on the sidelines. Two of the panelists, Michael Heisley of The Heico Companies and David Shapiro of KPS Capital Partners, were especially illuminating as to at least the attitude of some of the experienced distressed money. They both articulated a host of reasons why there organizations are currently taking a very cautious approach to new equity investments in that they see the downturn as (1) long lasting (as in 4-5 years), and (2) not yet at close to the bottom.

All manner of financial entities need to keep their visibility up and thier pipeline of potential deals flowing. The challenge in the current environment is to ferret out those entities who are really doing deals at this time, as opposed to those who are just trying to keep visibility for a future time. Woe be to the Restructuring team that wastes much of their precious time dealing with an organization that is more interested in maintaining their image of doing deals rather than really doing deals at this time.

Up next: Takeaways from the Conference.

TMA Distressed Investing Conference in Las Vegas

I am writing this from the TMA Distressed Investing Conference being held today and tomorrow at the Bellagio Hotel in Las Vegas. There are about 400 registrants representing a cross section of law firms, turnaround firms, and investment banks that make up the heart of the professionals serving the Restructuring market. There are a handful of distressed investment funds represented, but the paucity of such firms present suggest that many potential distressed investors are focusing on their own issues these days.

Conference Co-Chairs Jeffrey Fitts (of Alvarez and Marsal) and Andrew Miller (of Houlihan Lokey) did a great job of assembling some excellent panel topics and first rate speakers.

The event provided an excellent opportunity for me to get some updates on current trends from the program, as well as connect with friends in the industry who were kind to let me grill them on their perception as to where the industry is going.

The program launched really strongly with the morning being devoted to a thorough exploration of the twin Chapter 11 cases of American Color Graphics and Vertis: The First Dual Prepack Merger. Professors Laura Resnikoff and Edward Morrison, both of Columbia University did a superb job of setting up the dynamics that resulted in this first. The professionals involved in the case then provided their insights into how the dual prepack evolved.

My hypothesis, for this blog as well as for my consulting to firms looking to be among the winners in the Restructuring world, is that the Restructuring process is going to need to change as a result of changed circumstances in the environment. This case is a good example of the kind of innovations I expect to see more frequently, if the profession is going to be a contributor to effectively resolving the morass before this country.

My subsequent one-on-one discussions with Professor's Resnikoff and Morrison demonstrated they see changes occurring. Neither they...nor I...have a crystal ball, but they are seeing changes in processes by innovators (ala the dual prepack). As just one example, Professor Morrison has been studying the ratio of liquidations to restructurings over the years...a subject I will cover in subsequent posts.

The Thursday afternoon session started with the Keynote presentation by Harvey Pitt, former SEC Chairman and current CEO of Kalorama Partners. Harvey has the wisdom and experience to be very thoughtful about the changes that I (and more importantly he) believe are much needed to foster greater transparency in the capital markets. I always enjoy hearing Harvey speak, and this time time was no different.

Harvey Pitt's presentation was followed by excellent panel discussions on a more traditional Chapter 11 case (Radnor Case), on the toxic paper of Credit Swaps (my classification, not that of the speakers), and on challenges with exit financing.

Stepping back from the details of the day, I heard lots of change. Yet, I also talked to many professionals who seem more joyous that the pendulum had swung back to them than interested in learning how what has swung back is a very, very different pendulum.

Recently on my other blog, Prospering in Tough Times, I wrote about dinosaurs in other industries and in the general population. I guess I shouldn't be surprised that the Restructuring industry I so respect has its share of dinosaurs. Here is hoping that the voice of the innovators get heard so that the profession is at its best serving the enormous amount of troubled companies.

Up next: Day 2 of the Conference.

Is Everyone Really a Turnaround Expert?

The market is booming with turnaround "experts." And, I am seeing more and more claims of such expertise every day.

As I wrote in my last post on The Lost Art of Turnarounds, I believe turnarounds are tough stuff. A bonafide turnaround expert requires an awesome array of skills, experiences, and insights. The array is so awesome that one would think that far, far less than 1% of all CEOs, COOs and experienced consultants could actually have what it takes to lead a successful turnaround. Yet,

claims of being a turnaround expert abound.

The vast majority of senior executives who get sacked or laid off and are over 50 years old are going to have a difficult time getting rehired in corporate America at anything close to a similar level of responsibility. Wicked age discrimination is the unspoken part of the downsizing that is occurring in every industry, across the country. In other downturns, some of these executives would have used some of their retirement funds to buy a business or launch a franchised operation. For most of these laid off executives, retirement funds have been decimated by the market meltdown and thus buying or starting an operating business will be an option for far fewer. So, I expect to see more people forming boutique consulting firms and offering themselves up as a turnaround "expert."

Adding to this supply of claimed experts will be the thousands of directors and partners of Restructuring firms whose real experience is in forensic activities, but after twenty years of doing that work now see an opportunity to realize their dream of being a turnaround "expert."

Regretfully, notwithstanding valiant efforts by the Turnaround Management Association, certification of turnaround professionals has never been soundly endorsed by the major Restructuring firms....at least that is what shown in many firms by comparison of the number of Certified Turnaround Professionals in a given firm to the number of professionals claiming turnaround expertise from the firm.

Without a widely accepted standard for certification, or the rigorous ranking of attorneys as provided by Chambers, the hordes of turnaround experts are descending on all the constituencies and offering their expertise. Constituents, left to their own devices, are already starting to use the newbie pricing as a lever against the bigger firms.

What a mess! And just when this country needs great turnaround experts more than ever.

Just another indicator of why I believe that big changes are coming to the Restructuring profession.

This is the third and final post in a series on tunarounds that started here. Up next, a report on the TMA Distressed Investment Conference from Las Vegas.