How do you restructure a company? This article describes established strategies, from corporate takeovers in the 80s to pre-pack sales at the beginning of this century. Against this background, it claims that a new (potentially disruptive) trend is emerging from cases like Bombardier and Mitsubishi. This trend is represented by fire-acquisitions after the target company has been hit by a corporate scandal which has significantly depressed its market value (‘scandal strategy for corporate restructuring’).
This article investigates the risks associated with the purchase of a profitable portion of a business by a competitor. Usually the competitor uses a (directly or indirectly) corporate scandal to reduce the market value of the target company.
The first part of this article is dedicated to the description of how corporate restructuring used to be carried out from the 80s until recently.
Throughout the years, several tactics have been devised to restructure poorly-performing companies and maximise profits. In the 80s, ‘consolidation’ through acquisitions has featured among top priorities for independent directors of large companies, especially in the United States. This caused a wave of hostile takeovers and leveraged buyouts.
Many of these takeovers were undertaken to maximise short-term returns at the cost of long-term performance. They were promoted by managers who exploited their control position to build empires at the expense of profitability. Not surprisingly, these takeovers have been followed by an upsurge of corporate restructuring.
In the 90s, corporate restructuring emerged as the new Eldorado. It allowed highly indebted corporations to reduce their debt, cut their costs (and employees) and refocus on their core business. Furthermore, in the U.S. the debtor-in-possession Chapter 11 procedure proved particularly enticing for directors, who had the legitimate hope to be the puppet masters of the turnaround process, and sometimes even to be retained in the restructured new.co.
However, corporate restructuring by means of formal insolvency mechanisms was afflicted by some limits, primarily the length and complexity of the procedure, its cost and the associated long-term distrust and stigma in both suppliers and customers.
More recently, to address some of these issues, Anglo-Saxon insolvency lawyers encouraged a creative use of the existing laws. They orchestrated pre-pack and fire-sale procedures, where the distressed business is directed into a whistle-stop tour through the insolvency procedure.
In pre-pack or fire-sales, the restructuring plan is agreed, and the buyer of the profitable assets is identified before the filing of the insolvency petition. The insolvency process is basically reduced to an auction procedure aimed at verifying that nobody else on the market is willing to place a higher bid on the ailing corporation.
This novel approach to corporate restructuring has proven successful in several cases. The Chrysler overhaul has been illustrative of the advantages of this strategy. In 2009, the third large automotive industry in the U.S. spent just 31-days in the insolvency procedure, while the controlling stake of the restructured business was purchased for free by one of its competitors, Fiat S.p.a.
Since its emergence from bankruptcy, the car manufacturer has enjoyed significant success. It can be argued that the deal has been particularly advantageous for the ‘buyer’, as 84.7% of its 2016 EBIT is currently generated in the NAFTA region, primarily by brands which belonged to the former Chrysler Corp..
Despite being a great deal for stalking-horse buyers, fire-sales and pre-packs present disadvantages as well. Would-be buyers have to discount the risk of higher bidders in the insolvency auction. The insolvency process still entails significant costs, and the stigma associated with it continues to present a remarkable barrier, particularly in the public opinion. For instance, after the 2008/2009 bailout of General Motors and despite the company’s success history since then, there are still people in the U.S. who refer to the company as ‘Government Motors’, and who vowed not to ever again buy a GM-made car or truck.
Until recently the business community has devised no better alternatives to deal with corporate distress. However, in 2016 Renault-Nissan may have inaugurated a new trend: scandal-driven corporate restructuring. This article will now discuss how scandal driven restructurings came to life, and its potential implications for the corporate restructuring practice.
In October of that year, Nissan Motors Co. completed the acquisition for US$2.3 billion of a 34% controlling stake in the battered Japanese automakers Mitsubishi Motors Corp (‘MMC’). At the time MMC’s stock value was trading at considerably low prices due to a fuel cheating scandal.
It was engineers at Nissan – for which Mitsubishi produced two vehicles under a license – who discovered and denounced to the Japanese authorities that MMC was using unapproved mileage tests that exaggerated fuel performance. MMC admitted its responsibility in April 2016 and since then it has been forced to stop the production of eight of its vehicles.
The unexpected gravity of the facts – particularly in the wake of VW’s dieselgate scandal – and the lack of major ongoing co-operations with other automakers allowed Renault-Nissan to secure the control of an important competitor for a fraction of its market value.
The Mitsubishi affair was not an isolated case. Recently, the European aircraft giant Airbus acquired 50.1% of the Bombardier C-series programme for just US$1. The future of the C-series production attracted serious concern after the Canadian company was hit by a 300% import levy imposed by the United States.
The huge tariff followed a complaint from U.S. incorporated Boeing that Bombardier had dumped its C-Series jets at absurdly low prices, thus prompting a sale of 75 C-series jets to the U.S. airline Delta.
This one-dollar-deal is remarkably similar to the Mitsubishi affair, as the scandal that hit Bombardier gave one of its competitors a technological lead on the market. There is a further concern that the Airbus-Bombardier deal was orchestrated with the complicity of Boeing, as the transaction occurred only days after the U.S. authorities imposed the tariff. Additionally, the complaint itself is suspicious, as it was submitted by a company (Boeing) which does not even produce a plane with a similar seating capacity to the C-series jets. Might it be possible that Boeing and Airbus shared the view that the less the competition there is, the higher are the profits?
A cartel/agreement between competitors would not be unheard of, especially in the transport industry. For instance, in July 2016 the EC has found that MAN, Volvo/Renault, Daimler, Iveco, and DAF (joined by Scania according to the latest developments) broke EU antitrust rules. These truck makers had colluded for 14 years on truck pricing and on passing on the costs of compliance with stricter emission rules for which the Commission has imposed a record fine of €2.9 billion on them.
To conclude, in the 80s uncertain economies of scale justified a huge premium over the seller’s stock price. Nowadays companies are buying at a discount after properly timed corporate scandals.
The Renault-Nissan-Mitsubishi and Boeing-Bombardier-Airbus deals inaugurate a new pattern for corporate restructuring and M&As: the scandal-driven acquisition. Is this a new trend for the years to come? Should regulatory measures be introduced to protect investors and workers?
It is high time that the business and legal communities recognise the existence of these practices, and start debating about their consequences, risks and opportunities.
According to latest financial data from the company: https://www.fcagroup.com/en-US/media_center/fca_press_release/FiatDocuments/2017/january/FCA_%202016_FULL_YEAR_AND_FOURTH_QUARTER_RESULTS.pdf.