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The Restructuring Riddle; Distress is an obvious hot spot, though new efforts to target the market will be hard pressed to establish a lasting franchise The shutdown of the traditional market for mergers and acquisitions has impelled many boutiques and merchant banks to seek out new areas of growth. Restructuring and bankruptcy M&A, quite predictably, has been an obvious destination. Some warn, however, that the fruits of a restructuring platform may not yield the same kind of fee-generating rewards that typically appeal to the investment banking community. Indeed, the race to establish a presence in restructuring has already been fast and furious, and has taken on a number of forms, be it a notable new hire or even an acquisition. Piper Jaffray, for instance, recruited Victor Caruso in December to spearhead its restructuring platform, while Oppenheimer & Co., last October, subsumed Fulcrum Strategy Partners to serve as its restructuring arm. Specialists in distress, however, caution that it can be difficult for fledgling efforts to make up for lost time. A prominent new hire can bring instant credibility, but may also lack the underpinning to win any significant mandates. Moreover, a simple appointment and re-alignment of staff will not necessarily signify that a firm intends to dedicate itself to the space for the long-term. "Marginal efforts will be consigned to marginal engagements," Durc Savini, a managing director at Miller Buckfire, predicts. "You can hire a veteran restructuring adviser, but anyone referring a larger case will be concerned that the individual lacks adequate support." This is perhaps why some firms recruit entire teams. To wit, Morgan Joseph & Co. poached James Decker from Alvarez & Marsal in September to oversee its special situations platform. With Decker came Matthew Berk, Alex Fisch and Jay Jacquin, all of whom were senior directors at A&M, in addition to three other team members. The fact that so many groups are building up their restructuring efforts underscores the cyclicality of the segment. And that reflects another paradox facing newer players - namely, they may be hesitant to put a lot of resources into a platform dedicated to a market that will eventually stall. "Clearly it's a cyclical business," James Loughlin, Jr., a principal and managing director at restructuring firm Loughlin Meghji & Co., says. "My experience is that it's an opportunistic play for a lot of firms. They'll come in and leave; only a handful have remained [in the space] throughout the cycles." Even during headier times for restructuring, marked by a rising corporate default rate, the market doesn't necessarily provide an overflow of opportunities. In 2008, for instance, Moody's Investors Service tallied 101 defaults by corporate issuers. The default rate bounced to 1.9%, representing the first uptick since 2001, according to the ratings agency. Among speculative-grade issuers, the default rate climbed to 4.1%, and Moody's has predicted there will be a fourfold increase in the speculative default rate for 2009, a projection that implies roughly 300 corporate defaults. While such a forecast clearly highlights an opportunity, to an intermediary fresh off of an M&A bubble, one or two restructuring mandates won't make up for the 45% drop in deal volume registered between 2007 and 2008. "When the market turns they'll move their resources into other opportunities; areas that offer higher velocity transactions that are frankly more profitable," he says. "A restructuring adviser may get a $5 million fee after a 12-month engagement, whereas investment banks, in a normal market, can turn a $5 million fee in two weeks in other product areas." Some boutiques recognize this quandary. Berkery Noyes & Co., for instance, decided to pursue a strategic partnership to tap into the growing restructuring market. John Shea, chief operating officer of the firm, noted that the alliance with Seneca Financial Group represented the quickest way for Berkery to enter the market. He added that management considered other options, such as possible new hires, but ultimately decided against that path because of the market's feast or famine quality. "When [restructuring] cycles down, what would those people do at a boutique M&A shop?" Of course, given the seemingly permanent dislocation on Wall Street, some believe the banking business will rebuild itself around advice. "Wall Street has its roots in advisory," Loughlin says. He adds that the banking model will shift back to a consultative archetype, which could make restructuring more than just a cyclical play. Broadpoint Securities' March acquisition of Gleacher Partners might reflect this shift, as the deal will marry Gleachers' advice- and execution-leaning business with Broadpoint's capital markets capabilities. "Restructuring transactions are rarely permanent," Loughlin adds. "The economy improves, business improves, and then those companies are back in the market… And once we take a company through a restructuring or crisis management situation, we'll sustain that relationship on the back end with whoever ends up owning the business."
Mergers & Acquisitions: The Dealmakers Journal |
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