©2002 ReeseMcMahon, L.L.C., Strictly Confidential
Evaluating Distressed Companies
William J. Henry
August 20, 2002
©2002 ReeseMcMahon, L.L.C.
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Agenda
Overview of distressed business
Liquidation
Analytical Framework
Historical Analysis
Projected Opportunities
Risk Adjusted Valuation
Investor Considerations
©2002 ReeseMcMahon, L.L.C.
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Causes of Distress
Perception
Macroeconomic causes
Recession, interest rates, exchange rates, unemployment rate,
consumer sentiment, “shocks”
Industry specific causes
Overcapacity (telecom), global shifts (textile), import limitations
(tariffs), restrictions (environmental), technology
Financial causes
Overextended, undercapitalized, inadequate cash flow for debt
service, capex, working capital
Operational causes
-
Loss (or addition) of major customer, over-expansion, failed
growth initiatives, failed restructuring initiatives
Reality: Management is the root cause of most distressed businesses
©2002 ReeseMcMahon, L.L.C.
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Financial and Operational Distress
Financial Distress:
Good business, ok cash flow, bad balance sheet
Restructure Debt
Operational Distress – Early Stage:
Ok business, bad cash flow, ok balance sheet
Turnaround
Financial & Operational Distress – Later Stage:
Questionable business, bad cash flow, bad balance sheet
Turnaround & Recapitalize
©2002 ReeseMcMahon, L.L.C.
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Threshold questions
Focus on fundamentals:
1).
Does a viable core business exist?
2).
Can the business be fixed?
3).
Is it worth fixing?
©2002 ReeseMcMahon, L.L.C.
6
Threshold questions
Focus on fundamentals:
1).
Does a viable core business exist?
2).
Can the business be fixed?
3).
Is it worth fixing?
Tendencies
Successful
Turnarounds
Unsuccessful
Turnarounds
Severity of decline
Manufacturing efficiency
Turnaround philosophy
Product change
Management turnover
Management focus
Company attributes
Shallow
Lower
Grow revenues
Revolutionary
High
Financial
Deep
Higher
Cut costs
Evolutionary
Low
Operational
©2002 ReeseMcMahon, L.L.C.
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Agenda
Overview of distressed business
Liquidation
A