Successful Restructuring

Continuous growth in shareholder value remains the key business objective for private and public business enterprises. However, growing revenue and profitability year after year in fiercely competitive markets, is a challenge that few companies achieve on a consistent basis. Expansion through acquisition, whilst tempting for revenue growth, can lead to complex integration issues and periods of under performance. Several executives of HP have had to resign over the past decade due to poor integration of acquisitions.

Companies will therefore have periods where restructuring and business refocusing is required. It is crucial that the board of directors and the management team recognise the requirement to restructure, develop an executable plan and, if necessary, negotiate with creditors and shareholders. In cases where financing difficulties become apparent, the court based solutions of administration and/or insolvency can be avoided if the need for change is accepted.

In this newsletter we plan to analyse the restructuring process and highlight solutions to ensure a successful outcome.

Why do companies get into difficulty?

There are several reasons why companies reach a situation where a refocusing, or a restructuring, is required. These include changes in the competitive environment and an inappropriate cost or capital structure.

Changing Market Dynamics

The globalisation of business has lead to a rapidly changing environment. The winners are the companies able to embrace these changes by reducing costs, whilst increasing the quality of their products and services to their customers.

Capital Structure

In a low interest rate environment, there is a tendency for companies to leverage their balance sheets as the cost of debt is significantly lower than the cost of equity. Finance theory also highlights the advantages of holding a certain amount of debt on a company balance sheet to benefit from the tax shield effect of interest payments. Furthermore, the leverage buy-out specialists have found that a significant amount of debt on the balance sheet matched with the necessary incentives, focuses the attention of the management team to cut costs ruthlessly, expand the company’s markets and repay debt as rapidly as possible.

However, in a competitive environment, with declining revenues and profitability, inappropriate amounts of debt on the balance sheet requires rapid action and restructuring.

Cost Structure

Companies that are unable to reduce their costs in comparison with their competitors will rapidly lose profitability. Maintaining a flexible cost base in rapidly changing market conditions is an important goal for companies. The ability to outsource production and services provides a company with the opportunity of converting fixed into variable costs. There are of course limitations to outsourcing, particularly in the areas where companies need to develop and maintain their competitive edge, such as product development. However, the cost advantages versus the potential loss of control of certain aspects of the business have to be considered carefully.

Restructuring options

The first task for the board of directors and for the senior management team is to accept that there is a requirement to restructure the business. Private equity firms, due to their effective monitoring role of management, can often force change in a company’s management team and accelerate a restructuring more rapidly than in a public company situation. In some cases, a change of senior management is required in order to refocus the business, as occurred at IBM in the early 1990’s. Lou Gerstner, an outsider, successfully led the transformation of the business from a focus on hardware to one on services.

In any case, the commitment of the senior management team must be secured as early as possible in the process and an executable short to medium term plan must be put in place with clearly identifiable targets.

Cost Cutting

Stage One of the restructuring process is for the company to cut costs and to redeploy resources as rapidly as possible. Once the decision on the direction of the company has been taken, the disposal of surplus assets needs to be executed. Whilst a rapid sale reduces the proceeds, a structured auction with sufficient competitive tension ensures that a market price is obtained for the assets. In the situation where assets are required for the future business, it may be possible to remove them from the balance sheet through sale and leaseback transactions, or through the formation of joint ventures and alliances with partners.

Throughout this process, it is essential to reduce the uncertainty for employees through constant communication. A well executed cost reduction plan needs to include careful management of the free cash flow generated by the business.

Negotiating with Creditors and Shareholders

With an over-geared balance sheet and falling profitability, early discussions with creditors and shareholders are essential in order to develop a realistic workout plan. Whilst shareholders may be unwilling to inject further funds into an ailing business, creditors will be keen to avoid, as far as possible, a court based administration and insolvency procedure due to the high costs involved. With a credible plan and management team, convincing creditors to accept significant reductions in their repayments is an achievable objective.

Deals can be structured creatively to include short term payment holidays or balloon payments, once the business has been transformed. Equity sweeteners also can be added to provide creditors with upside potential in return for a lengthening of the repayment period, the injection of further debt and/or the reduction of liabilities. As long as creditors have the confidence that the restructuring plan is achievable, there are many alternative financial structures that can be negotiated between a willing management team and creditor group.

Merger into another Firm

During the restructuring and asset sale process it may become apparent that a full sale, or merger of a business, either to a competitor, or to a financial investor is required. The existing business either can be fully absorbed into another company in a similar sector to generate synergy benefits, or can be retained as an independent subsidiary under new direction. In either case, such a strategic transaction is transformational for the business and provides a catalyst for the successful restructuring of the business.

A Formal Restructuring

In the situation where a more drastic financial restructuring is required and there are too many disparate creditors, it can be impossible to negotiate a restructuring without a formal process. In the UK and in the US there are two main methods:

• Administration or Chapter 11
This is a formal supervised modification of claims on a business. The aim in these situations is to preserve the business as a going concern, or to sell the business. Creditor claims are frozen and in many cases a radical restructuring plan is put in place. The aim of the process is to preserve as much value for the creditors as possible, often to the detriment of the equity holders.

The administration/Chapter 11 process has been used in certain circumstances by aggressive management teams in the UK and in the US to force creditors to accept write-offs of their loans. However, the administration process also has negative consequences for the business and often leads to customers and suppliers renegotiating, or cancelling their contracts. This often impacts negatively on the future viability of the business.

• Liquidation or Insolvency
The most drastic situation for a business is liquidation, or insolvency, where the business effectively ceases to exist and a court appointed liquidator disposes of the assets and makes a distribution to creditors according to their level of security. Shareholders and unsecured creditors will invariably receive little or no payment in this situation.


Financial distress is costly for creditors and shareholders and prompt action at an early stage is essential to achieve a successful outcome. Close communication between the management key shareholders and creditors is necessary in order to avoid a court based procedure with the detrimental effect of the business.

Obtaining the necessary financial and legal advice at an early stage can assist a management team in developing a plan that is achievable and provides the necessary confidence to the key creditors and shareholders.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.

Considering Flotation?

Embarking on a listing is one of the key decisions that a company’s board can take. To ensure a successful transaction, the board needs to select the timing, the advisers, the location of the listing and the non executive directors for effective governance.

In this newsletter we will explore the factors required to turn a company into a public entity and to ensure that life in the limelight acts as a stimulus to growth in shareholder value. We will then look at a case study of a successful flotation on the AIM market in London of Gilat Satcom, an international satellite voice and data supplier, based on the views of David Dwek, who was appointed to its board as a non executive director at the time of flotation.

Reasons for a Flotation

A flotation is a key milestone in the development of a business, even though there are alternatives which include private equity and bank financing. In the appropriate circumstances, the advantages of a public listing far outweigh the associated regulatory and related costs. These are:

  1. Access to capital. Growing companies are often constrained from rapidly raising funds in the private markets. Once a company is listed, funds can be raised efficiently from investors through rights issues and equity placings as there is a deep pool of funds available from both institutional and private investors. In addition, a diverse investor base allows a public company to broaden its funding sources through the domestic and international bond and hybrid security markets.
  2. Exit Opportunities. A stock market listing provides transparency to the valuation of a business. It also provides the necessary liquidity as a minimum requirement of around 25% of the outstanding share capital is often required to be in public hands. This allows shareholders, including employees with share options, to sell their shares at the appropriate time. On initial flotation, management and shareholders are normally “locked-in” for a 6-12 month period to ensure their commitment to enhance shareholder value.
  3. A Currency for Acquisitions. The transparency afforded to a publicly listed company on the valuation of their business allows the use of shares in exchange for a target company. Alternatively, funds may be raised through a sale of equity to investors to fund a cash based acquisition.
  4. Improved Profile. The increased profile and regulatory requirements provide companies with a stamp of approval, enhancing the perception of financial stability of the business, leading to improved relations with customers and suppliers, as well as attracting and retaining key management.
    Becoming a public company requires more rigorous regulatory and governance procedures as well as enhanced financial reporting requirements. A company will also be in the public eye and the directors’ actions will be under scrutiny. However, the increased professionalism of the business through efficient systems and control procedures provides a solid base for the future growth of the business.


Choice of Market

When considering the listing location for a flotation, there are a number of factors to take into consideration:

  1. Domestic vs International. Initial consideration is often given to the domestic market; however, with the globalisation of the international capital markets there are strong opportunities for internationally oriented firms to float their shares on foreign markets. London and New York remain the most active markets for such listings. Russian and Israeli companies in the energy, mining and technology sectors have been actively seeking listings on the London market this year and Chinese companies, due to their large size, in New York. Following flotation, maintaining active and on-going investor relations is crucial to develop investor interest and to avoid the “orphan stock” scenario.
  2. Regulatory Requirements and Market Capitalisation. Heightened regulatory requirements, have substantially increased the costs of maintaining a listing. In the US, the Sarbanes Oxley legislation has led to an increase in on-going costs from an average of $1.8m to $3m per annum. This, combined with the investor and analyst requirement for liquid stocks, implies that a minimum market capitalisation of $150-200m is required prior to a flotation. A main listing on the London Stock Exchange requires a similar market capitalisation and a target £50m capital raising to generate sufficient investor interest. There are, however, alternate options for international companies such as pursuing a domestic followed by an international listing.
  3. Small to Medium Sized Companies. The London Alternative Investment Market (AIM) is an attractive option for companies with a capitalisation less than $100m. There are also less onerous reporting and regulatory requirements than for a US SEC Registration or for primary London listing. Overall, the market has gained in depth and liquidity with over 1000 domestic and international companies listed on AIM since the market’s inception in 1995.  All major UK institutions now invest in AIM with around 35% of the market institutionally invested. Investors have become increasingly comfortable with the market as the directors of listed companies have to take full responsibility for information and the timing of disclosure. Nevertheless, with smaller market capitalisations and, consequently, lower liquidity, there is often higher volatility in the share prices of the companies traded, particularly of the smaller companies. Raising equity finance, particularly following the initial listing is, however, a rapid process for companies with attractive growth prospects. In general, the AIM market can be viewed as a stepping stone for a company and an intermediate financing vehicle prior to a move to a larger exchange, or to an exit of the business.

With the increased regulatory and reporting requirements, irrespective of the market chosen, the decision to float must be based on a realistic assessment of the company, its growth prospects and whether the alternative options of private equity and bank finance may be more appropriate.

Factors leading to success

There are a number of ways that will ensure a company has a successful public market experience:

  1. Sufficient management depth. Running a public company from the regulatory perspective and reporting to the investors requires an experienced management team. Companies need to strengthen their board of directors and to ensure that there is sufficient quality in the management team to deliver the business plan.
  2. Business Plan. The goal of investors is to realise a growth in shareholder value through capital gains and dividends. The relative performance of a company within its sector will also be closely followed. A clearly executed plan based on either organic and/or acquisition growth is necessary and the performance of the management team will be judged against the targets set. Managing investors’ expectations is a challenge, but is crucial for success.
  3. Managing investors. Consistent investor relations are crucial in order to maintain interest in a company following a flotation, particularly for an international company. Regular news flow and meetings with investors is essential. This is particularly the case when there is a downturn in the fortunes of a company. A clearly argued strategy on how to rectify the situation can often lead to investors purchasing further shares. This requires a significant time commitment of the senior management, but will be worthwhile, especially when further financing is required.

Case Study: Gilat Satcom Limited

Gilat Satcom is an Israeli based international provider of broadband and voice satellite services, particularly in emerging markets. The company has grown rapidly and profitably over the past two years and in early 2005 merged with its largest local competitor. This has provided a revenue base in 2004 of around $28m and profit of $2m.

In the past, SEC Registration and a quotation on NASDAQ would have been the preferred route for the company. However, following the enactment of the Sarbanes Oxley legislation in the US, the regulatory requirements on public companies increased significantly requiring Gilat Satcom to reach a market capitalisation of $150-200m for the US markets to be sufficiently attractive for investors.

The directors, therefore, had to decide on the advantages of a domestic listing on the Tel Aviv Exchange, or an international listing on AIM in London. For a company with significant international business, AIM offered access to large institutional investors and the liquidity of the market for future fundraisings.

Gilat Satcom took the decision earlier this year to pursue an AIM listing. Domestic and international financial and legal advisors were appointed and the fund raising was completed in a four month period. The due diligence process was rigorous and the prospectus issued was very detailed with a full verification process of all the statements. A research report was prepared for the investors and the senior management of the company was involved in an extensive two week roadshow in the UK and Europe where they met with a large number of institutional investors. The company floated around 22% of its share capital and raised $8m in August 2005.

To satisfy investor requirements, two UK based non-executive Directors were appointed: David Dwek was appointed to the Board in mid August 2005.

In 2008 a controlling share of the business was sold to a major local telecom investor and operator. The business was subsequently de-listed from the AIM market as the free float of shares was too ,ow to maintain sufficient liquidity in the secondary market.

Under current equity market conditions it is once again attractive for companies to consider a flotation of their shares. For a fast growing company requiring their equity to grow organically, or via acquisition, a listing can provide the necessary platform to achieve their objectives.

Given the current regulatory and market capitalisation requirements, the choice of market for a listing is important. In addition, deciding when to float is crucial. There are alternative sources of finance which should be carefully considered by the board of directors prior to flotation. The right decisions at this crucial stage in a company’s development will lead to success.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.

How to enhance a company’s valuation prospects?

Enhancing shareholder value is a key objective for the management teams of both private and public companies. A company’s strategic plan requires a clear focus on the options to crystallise an increase in value through a liquidity event such as a flotation, an M&A transaction, or a joint venture.

In our previous newsletters we have examined strategic business options including management buy-outs, acquisitions and stock market listings. All these transactions require an appreciation of the valuation of a business and how this can be enhanced. Below, we will review the alternative methods which can be used and discuss the applicability to both private and public situations.

Valuation methodologies

Valuing a business is often more an art than a science. For a public company, the market capitalisation or the equity value, of the business provides an important reference point based on publicly available information. To assess the full value of a business, the following factors need to be taken into account:

  1. the liquidity of the shares;
  2. the premium required to take control of the business; and
  3. the capital structure.

For private companies and divisions of public companies, straightforward mathematical formulae can be employed. These calculations generate the company’s value based on either forecasted cash flow, earnings, or by analysing the value of comparable listed companies and recent M&A transactions in an industry.

Prior to performing the arithmetic, it is important to take a strategic view of the industry and of the future prospects of the company in order to place the valuation figures in the correct context. An analysis of the competitive environment, barriers to entry, potential for substitute products and the strengths and weaknesses of the company will put the forecasted cash flow and earnings into perspective. Below, we will review the three most commonly employed valuation techniques.

Discounted Cash Flow

The discounted cash flow (DCF) approach is the most commonly used method to value companies, or specific projects. The basis of the calculation is free cash flow. This is cash available for distribution to the debt and equity providers after all planned investments have occurred, including both working capital and taxes. Adjustments are made to the financial statements for non-cash items including depreciation and goodwill. A financial model is developed of the forecasted profit and loss, balance sheet and cash flow statements for the company. Typically, a five year period is used. The assumptions underlying the forecasts are important to the integrity of the model. Furthermore, the process of developing the model and checking the consistency with the competitive strategy of the company within the industry is as important a process as the calculation of the final valuation figure.

As a going-concern a business will normally operate well beyond the 5 year forecast period. It is therefore necessary to estimate the “terminal” or “continuation” value of the business. Over time, with competition, a firm’s performance tends to converge to the industry average with 5-7% growth rather than say an initial 15-20% growth. With normalised cash flow and growth prospects a valuation according to comparable multiples will provide reasonable accuracy. This is typically an EBITDA multiple; or earnings before interest, tax, depreciation and amortisation. Therefore, the valuation of a company taking into account the time value of money can be separated into its constituent parts.

Value of
expected future
free cash
Present value of
free cash flows
during explicit
forecast period
Present value of
terminal value at
the end of the explicit
forecast period
The resulting value represents the enterprise value of the business available to all security holders discounted with the Weighted Average Cost of Capital, or WACC. The WACC reflects the combined cost of debt and equity with the weights of these capital sources based on their market, rather than book values. The key point to highlight is that a company’s WACC declines as it employs additional lower cost debt, thereby reducing the proportion of the more expensive equity. This is due to the tax shield resulting from the tax deductibility of interest payments.

The DCF process provides a valuation of the enterprise. The value of the equity can then be calculated by subtracting the net debt (total debt minus cash) from the enterprise value of the business. As with all valuation methodologies, it is important to carry out sensitivities around the key assumptions and to focus on a valuation range rather than on a specific number. Furthermore, as we discuss in the next section, comparing the DCF valuation with alternative methods is important as a sanity check. Each valuation approach contains useful information and, relying on several approaches in combination, is likely to produce more accurate valuation ranges.

Comparable Company Valuations
A more direct approach often used in practice relies on valuation multiples including:

  1. Price to earnings (P/Earnings per share);
  2. Price to book (book value of net assets); and the
  3. EBITDA multiple (market value plus net debt/EBITDA).

Multiples are estimated from the prices of public companies with growth and risk characteristics comparable to the company being valued. Firms in the same industry are the usual source of comparables. Precedent M&A or IPO transactions in the same industry are likely to be a good match especially if the targets had similar growth rates and margins. M&A transactions will provide an understanding of the premium paid under recent business scenarios. In the late 1990’s the premiums paid approached the 40-50% range. Since then, management teams have become more discerning and have been able to conclude transactions within a more reasonable 15-20% range.

Multiples can be applied to historic of forecast financials to obtain the present value of the enterprise or of the equity. Alternatively, the multiples are often used for the termination value in a DCF calculation. A forward multiple can give a better estimate of value because it incorporates expectations about the future. P/E multiples often differ between similar companies due to accounting differences, such as depreciation in earnings calculations. Net debt differences can also affect interest expense and earnings. For these reasons the EBITDA, or cash flow multiple is often used. For a business with good growth prospects a forward EBITDA multiple in the 8-12 times range provides a useful rule of thumb.

Revenue multiples are calculated by dividing the enterprise value by revenues. They are used to value companies for which no earnings are expected in the short-term. They can also provide an idea of value where no reliable cost information is available. These multiples are often used for technology companies with strong growth prospects. It must always be remembered that the key element in a company’s valuation is not the revenue generated, but the free cash. Many expensive acquisitions have occurred in the technology sector on the mistaken assumption that revenue growth leads to free cash flow!

Choosing the value to apply in a particular situation can only be made after a careful study of the company and its industry. A comparison of the value of similar public companies can provide a reasonable guide to value, particularly in private situations.

Valuation in merger and acquisition discussions

It is essential to have a disciplined approach to the valuation of the business and to be able to walk away from a transaction at the appropriate time.

The intrinsic value of the business is the net present value of expected future cash flows independent of any acquisition. This is the stand alone value and the basis for negotiations. Any price paid above the intrinsic value represents the control premium to be shared between the target company and the acquirer’s shareholders. This premium includes a market premium and the potential synergy value. These synergies comprise revenue enhancements, cost savings including financial engineering and tax benefits as well as process improvements.

Valuation at the time of flotation

With regard to a flotation, or a secondary offering of shares, it is typical for a company to be valued based on the comparable multiples of similar listed companies. In these offerings it is normal for the sale to take place at a slight discount to the existing equity value of companies. This discount is typically in the 2-5% range depending on the situation.
Improving valuation prospects

Whilst strong growth prospects for both an industry and an individual company are important factors in a valuation, there are a number of additional factors where a company can improve its prospects prior to a strategic transaction:

Depth of management team
Developing a core group of managers to lead a business without over–reliance on one person will be value enhancing for new shareholders. It is typical for an acquirer to enhance a management team with financial expertise whilst retaining an experienced Chief Executive and operating management team. However, in turnaround situations, replacing the top management team is often essential to revitalise the business.

Share Structure
A simplified share structure with one class of shares and one share one vote will enhance the transparency of the company. Private companies often have several classes of shares which have been issued during several rounds of financing. Alternatively, certain shareholders often retain voting control irrespective of the amount of financing. A simplified share structure will improve a company’s valuation, particularly when a flotation is under consideration.

Capital Structure
An under leveraged balance sheet will provide an opportunity to a private equity firm to restructure a business, increase debt levels and improve the return on equity. Furthermore, existing shareholders should question whether the current or an enhanced management team can restructure the business and increase the value without changing ownership. This has occurred successfully at Marks & Spencer over the last 18 months following the unsuccessful bid from Philip Green who attempted a leveraged public to private transaction.

Effective Corporate Governance
A board with effective independent directors successfully challenging the Chief Executive will lead to improved decision taking compared to an autocratic board. Separating the role of Chairman and Chief Executive has improved the governance at UK companies, although in the US there remains a preference for a combined role. A more effective board structure is important for key strategic decisions including acquisitions, divestitures and flotation. All of these transactions have a key impact on valuation.

Generating a valuation is basic arithmetic. The key factor to enhancing a company’s value is through the execution of opportunities that enhance the prospective free cash flow of the business. A company’s strategic position within an industry with solid growth prospects is essential plus a well structured business and an experienced management team.

Valuation is an art and not a science, but the process of calculating a company’s value in a systematic way can uncover key growth opportunities for a business.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.

Executing Merger and Acquisition Transactions

Generating revenue growth for companies is often more challenging to accomplish than a cost cutting exercise through a restructuring process. To achieve more rapid growth, senior management often opt for acquisitions if they perceive this will meet their growth objectives. Over the past 3 years there has been an M&A boom fuelled by low cost debt and accommodating equity markets which has extended from the public to the private sector.
Many companies have been able to acquire successfully, to integrate diverse businesses and to generate value for all their stakeholders. However, shareholders of both private and public companies are becoming more vociferous if their expectations are not met. Private equity firms have the ability to finance the acquisition of even the largest businesses. Therefore, management teams must have a realistic plan to achieve the acquisition benefits.

We will review the key aspects required for successful transactions. Senior management needs to take a holistic approach to the entire acquisition selection, financing and integration process.

Implementing a successful acquisition strategy

A clear strategic rationale is the first step to ensure a successful acquisition. The chances are significantly enhanced when the following are taken into consideration:

  • Business synergies, where an acquiring company’s core competences are accentuated;
  • Increased revenues, particularly through access to additional markets for existing and new products;
  • Consolidating the business sector with a focus on the potential for cost savings;
  • Enhanced barriers to entry against new entrants; and
  • Effective leadership, especially with a new CEO running the business and needing to motivate the management to deliver the new strategy.

There have been countless examples of destruction of shareholder value by companies through diversification into unrelated business areas. An example relates to Hewlett Packard and their many difficulties with post acquisition integration from Compaq to autonomy.  The company required several changes of leadership over the past 15 years.

The initial approach

Once an acquisition strategy has been agreed by the company, a small team should be assembled including specialist business development, financial and operational personnel. Financial advisers should be appointed as early as possible to work with the team in researching and approaching potential targets, or merger partners, with the initial intention of selecting a short list of one to three candidates for more advanced discussion and negotiation. It is vital at that stage to separate the operating management of the existing business from the M&A team in order to ensure the continuing focus on the existing business.

The due diligence process

Once interest has been ascertained in the business and ideally a period of exclusivity has been agreed, the due diligence process can commence. If a price needs to be disclosed at this stage then this should be as flexible as possible. Due diligence is the most time consuming and least creative part of the M&A process, but can have a direct influence on the final price achieved. It is also crucial to incorporate due diligence into the integration planning and to keep the same team involved throughout the transaction.
Due diligence can be separated into a number of areas depending on the complexity of the business. The main areas of focus are: accounting, legal, commercial, systems and human resources including the impact of pensions. The review will also provide the opportunity to evaluate the quality of the operating managers in the business.
A significant amount of time must be spent on commercial due diligence. Discussions with key customers and suppliers, joint venture partners and competitors provide invaluable information on the prospects for the business.

Pricing and final negotiations

There are several valuation methods assist the negotiation process. These include discounted cash flow, earnings and operating profit multiples as well as analysing comparable transactions.
The intrinsic value of the business is the net present value of expected future cash flows independent of any acquisition. This is the stand alone value and the basis for negotiations. Any price paid above the intrinsic value represents a premium to be shared between the target company and the acquirer’s shareholders. This premium includes a market premium and the potential synergy value. These synergies comprise of revenue enhancements, cost savings including financial engineering and tax benefits as well as process improvements.
However detailed the financial analysis has been, the final price will depend on a negotiation between the buyer and the seller. It is essential to have a disciplined approach to the valuation of the business and for the buyer or for the seller to be able to walk away from a transaction at the appropriate time.

Financing alternatives

With the large variety of new financial instruments developed, there are a variety of financing methods available:

  1. All cash deal. This is often the preferential route for selling shareholders. The purchaser can use internal resources or can raise funds from the banking, insurance or hedge fund sectors. A mixture of senior and subordinated debt can be raised. Alternatively, the bond or equity markets can be employed. Lenders are often willing to provide substantial sums, up to 5-7 times EBITDA for strongly cash generative businesses with assets to provide as collateral.
  2. Share transaction. Companies can use existing or new shares and use these as payment to the selling shareholders. If the prospects of the combined business are strong and there is potential liquidity in the shares, then this could be an attractive option for the selling shareholders.
  3. Hybrid options. A combination of cash, increased debt and shares could be used. For a larger transaction, bonds convertible into equity can be also considered.

Achieving closure

Once terms have been agreed, the financing arranged and the final agreement signed, there is typically a one to three month period before all the documentation is completed and the approvals received. A surprising number of deals fall apart at this stage and whilst there may be legitimate reasons such as a material adverse change in the business, it is also vital for the acquirers to sell the deal to the company’s stakeholders and to maintain the momentum to ensure there is rapid closure.

Post acquisition integration

Effective acquirers, such as GE, have perfected their ability to integrate companies rapidly into their organisation. The key elements in a successful integration are as follows:

  • Begin the integration process before the deal is signed with a combined due diligence and business integration team;
  • Dedicate a full time individual with decision making powers to manage the entire process;
  • Ensure constant communication to minimise the loss of morale. Reaching to the second tier of management as fast as possible and clarifying their positions reduces the possibility of significant defections;
  • Focus on a rapid integration process. There needs to be clear decision making authority from day one. A 100 day plan is required and tough decisions, particularly on personnel issues, have to be taken at the outset. Paralysis in decision making must be avoided.
  • Integrate not only the business operations but also the corporate culture. This is particularly important in cross border mergers.
    Poor integration planning and execution is one of the major reasons for value destruction in mergers and acquisitions.


Successfully acquiring and integrating businesses only occurs through a disciplined process and experience. A clear strategic rationale is required at the outset with identifiable synergies in combining the businesses.

A combined acquisition and integration team is required, which is supplemented by the necessary multi disciplined advisory team. Thorough due diligence must be undertaken which is critical both to the final negotiations and to the integration process.

Reviewing the alternative financing options at the outset can provide attractive alternatives.

Finally, it is important to note that in the excitement of the deal more value can often be generated for shareholders by walking away from a transaction than by pursuing a merger or acquisition of limited strategic benefit.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.

Raising Finance in a Challenging Environment

Financing Alternatives

Bank Finance

Financing is available from a variety of sources including new challenger banks

The key points in dealing with banks in the current environment are as follows:

  1. Commence negotiations early as the approval process is taking significantly longer to complete;
  2. Ensure compliance with all current loan documentation, information and covenant requirements;
  3. Broaden banking relationships, both domestically and if appropriate internationally; and
  4. Improve chances of successful financing by considering other options. These include financing based on assets, invoice discounting for working capital facilities, the provision of enhanced loan security and/or additional equity.

Equity & Bond Markets

The stock and bond markets are available for large and medium sized companies.

Bond markets have provided large amounts of debt for public companies allowing refinancing often at lower interest rates.

The following are the key points for a company considering an IPO:

  1. Solid Track Record. The Company needs to demonstrate that it has made both financial and operational capability for a public company.
  2. Sufficient Management Depth. Running a public company from the regulatory perspective and reporting to the investors requires an experienced management team to execute the business plan. Companies also need to strengthen their board of directors to ensure the necessary support and governance.
  3. Business Plan. The goal of investors is to realise a growth in shareholder value through capital gains and dividends. The relative performance of a company within its sector will be closely followed. A clearly executed plan based on either organic and/or acquisition growth will be monitored by investors.
  4. Managing Investors. Consistent investor relations are crucial in order to maintain interest in a company following a flotation and to manage expectations

Venture Capital & Private Equity

There is continuing availability of equity funding from both venture capital and from private equity.

Large technology companies  have been providing venture funding or purchasing purchasing smaller technology businesses

Bridging the GAP

In spite of the improving sentiment, there remain many situations where bank or equity/debt funding from the capital markets or from private equity/venture capital is not available. In such situations creative financing solutions need to be considered. These include:

  1. Joint Ventures. A joint venture with a client or a competitor is an alternative to an M&A transaction where financing may be an obstacle. This can provide opportunities to access new markets or sectors particularly internationally and where both parties add value to the venture. However, joint ventures can be difficult to manage and it is therefore imperative that clear responsibilities and the sharing of risk and return are agreed at the outset to avoid paralysis in decision making and potential poor performance. Whilst successful, JVs can continue operating for many years. There are cases where one party will purchase the shares of its partner at the appropriate time.
  2. Supplier Financing. With working capital constraints and limited bank funding, businesses may have to resort to a variety of methods to ensure business continuity. A supplier will be keen to ensure that his products can continue to be sold. Therefore the availability of extended credit lines, medium to long term loans and even equity injections have been provided recently by suppliers. Commencing early discussions is important and the company may benefit from the financing terms and the speed of response.
  3. Client financing. Similarly, a number of businesses have resorted to asking their clients for funding. With knowledge of the product and of the business, a client or a syndicate of clients can provide a more rapid bridging solution for short to medium term funding.
  4. Club Deals. For M&A transactions or for the purchase of assets, several equity investors can join together with the view of concluding a transaction and refinancing at a later stage when debt or private/public equity is available. This has been a common practice in the property market during 2009.

Activities of DC Dwek Corporate Finance

DC Dwek Corporate Finance prides itself in developing creative financing and transaction solutions for its clients and partners. During 2009, this has included successful financing, joint ventures and execution of complex Government contracts in the international mobile water desalination sector. This has provided hands-on experience of financing and growing an international business through a joint venture in a challenging market. Similarly, our advice to private and publicly listed clients on balance sheet restructuring has provided assistance with commercially appropriate solutions. Whether it is building businesses internally, via acquisitions, joint ventures, raising finance through banks or in the public markets, DC Dwek Corporate Finance has the international experience to assist clients.



The views expressed in this newsletter are for information purposes and are intended for eligible counterparties and professional clients only.
DC Dwek Corporate Finance Limited is authorised and regulated by the Financial Conduct Authority.

Improving Boardroom effectiveness

Much has been written recently on the subject of boardroom effectiveness following the massive destruction in shareholder value both before and after the financial crisis, we provide a summary of the key points and examine creative ways to improve the effectiveness of company boards.

Improving effectiveness

Over the past 12-18 months, regulators across the world have been conducting reviews and passing additional legislation to reduce the potential for accounting manipulation and fraudulent behaviour by companies. Whilst certain penalties will reduce unacceptable behaviour, the nature of business is in taking calculated risks. Therefore it is essential that good practice takes precedence over a culture of over-regulation and mere box-ticking. As we observed with the downfall of Enron, companies can find ingenious methods to circumvent rigid rules to their advantage.
Good practice therefore implies a set of prescribed principles to which companies adhere. The quality and intensity of debate at board meetings must be enhanced and this is where independent directors must be more prominent. They should not rely exclusively on the information provided by the company and its advisors, but must look to independent advice to enhance the quality of questioning of the executive team, particularly during a major strategic or financing event.
We no longer require a board full of “Yes men”, but a board of individuals that will take a unified decision following intense discussion and debate. Saying “No” occasionally will be healthy and may also lead to improved decision making.

What makes a non-executive director effective?

There are three key functions of a non-executive director. Firstly, to provide guidance and strategic input to the management team using their experience and network, secondly to ensure that there are the systems in place to monitor the performance of the team and thirdly to strengthen the executive team in a timely manner.
In order to add value to the companies with which they are associated, non-executive directors must above all uphold the highest ethical standards of integrity and promote the best standards of corporate governance. They must support the executive directors in the execution of the agreed strategy of the business whilst monitoring their performance and remuneration on behalf of the outside shareholders. This is a critical role and a fine balance is required in order to maintain an open relationship between executive and non-executive directors.
Non-executive directors are typically appointed for their commercial experience in a given sector. Their main role must be to question intelligently and therefore to add substance to the boardroom debate. However, whilst being sensitive to the views of the other board members, they must challenge rigorously.
Finally, the non-executive director must gain the trust of fellow board members in order to be viewed as a key team player.
The debate on the Higgs Report in the UK

The report by the Higgs Committee in the UK on the effectiveness of non-executive directors was published in January 2003 following a six month period of consultation and analysis. The proposals are likely to be amended prior to inclusion into a revised Corporate Governance Code.
In order to avoid a rigid one-fits all system, Higgs proposed a “comply or explain” approach to governance. For such a system to be widely accepted in the business community, there has to be general compliance with the principles of the Corporate Governance Code and limited deviations. In particular, smaller companies with more limited resources have voiced concerns on the potential rigidity of the new proposals such as the limits on the years a non-executive director can serve one company. A box-ticking approach to corporate governance needs to be avoided, or else methods will be devised to circumvent the rules and regulations.
The appointment of a senior non-executive director with access to institutional investors is viewed by a large number of Company Chairmen as potentially devisive as they believe it will reduce their role and effectiveness. Many large UK companies already have a Deputy Chairman who can play the role of senior non-executive director. Providing shareholders with an additional channel of communication, especially when there are contentious issues, is a healthy development.
The non-executive or independent directors should constitute the majority of directors. The main issue relates to the cost and time involved in appointing the appropriate non-executives, particularly for the smaller companies. Clearly increasing the pool of quality non-executive directors with the necessary experience and training for their role is key and this should be supplemented by independent advice, particularly at times of major strategic change.
Higgs has made a recommendation that the Chairman of the Board should not chair the nominations committee. This is a direct attempt to reduce the power of the Chairman and has met with strong resistance and is unlikely to be included in the Corporate Governance Code.
The Higgs report has been generally welcomed as a way of improving the high standards of corporate governance in the UK. As discussed above, certain modifications will need to be made to obtain broader business approval.
Is Sarbanes-Oxley a role model?

Following the Enron and WorldCom scandals in 2001-2002, the US rapidly passed the Sarbanes-Oxley Act in July 2002. It remains unclear as to the exact ramifications particularly for international companies that are listed on US Exchanges.
The main focus on the Act is to strengthen the role of the audit committee, particularly through the appointment of experienced non-executive directors and the provision of truly independent advice. Auditors are no longer permitted to provide a range of financial advisory services for the Board and for the committees.
Chief Executive Officers and Chief Financial Officers are required to certify to the accuracy of the financial statements and all off balance sheet activities will need to be explained in the accounts.
With securities analysts playing an important role in reviewing and analysing the financial statements of companies, a clear separation is required between the analysts and the investment banking services that can be provided by their colleagues.
In contrast to the wider ranging Higgs Review, the Sarbanes-Oxley Act has been viewed as a rapid response to the major accounting issues associated with recent destruction in shareholder value in the US. It does not however address some of the more fundamental issues in US corporate governance including the potentially excessive powers vested in the combined Chairman and Chief Executive Officer and the overly prescriptive nature of the regulations which has led to a culture of complying with the letter rather to the spirit of corporate governance.

Clearly the vast majority of companies are well managed and comply with the high standards required of the governing bodies and regulations across both sides of the Atlantic. However, with the recent scandals and significant reductions in valuations of companies around the world in the last 2-3 years, improvement is required.
Non-executive directors must play a more influential role. They need to enhance the level of discussion and debate in the boardroom and on the board committees to pose the appropriate questions. They need to be supported by the company, but also by appropriate training and independent advice. Once this more rigorous debate has been completed, then a unified board can follow the agreed strategy. We no longer need “Yes men”, but non-executives that will be willing in certain circumstances to say “No”.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.


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