The Value of a Merchant Banker
Merchant bankers work with management and operating partners to enhance the ultimate enterprise value of a company over time. While investment bankers are financial advisors focused on specific near-term transactions, merchant bankers take a longer view that is more closely aligned with management’s goals and compensation.
Recognizing the importance of “getting it right the first time,” most company owners seek out professionals (marketing agents, operational consultants, IT consultants, commercial bankers, commercial realtors, accountants and attorneys) whose expertise and experience can increase the viability and long-term value of their business. The availability of professionals and their expertise is often in direct proportion to the size of the company and its financial resources. Market, legal and practical demands cause each of the above professionals to be focused in their services. When emerging and underperforming companies struggle, it is rarely because of only one or two problems that these professionals can fix. Companies generally struggle due to the cumulative effect of one or two internal problems combined with external, uncontrollable events. Common examples of external events include industry transitions, loss/bankruptcy of key customers, economic downturns, loss of business partners and aggressive competitor encroachment, to name only a few of many possible challenges.
For example, commercial bankers probably have the broadest economic vision of the any of the above professionals. Yet the role of commercial bankers is legally limited by the nature of their superior claims for payment (collateralized loans) and OCC imposed requirements when a company is facing illiquidity. Accountants and consultants probably have the best vision of how the problems can be fixed. Yet the fee driven role of accountants and consultants is usually legally and/or market limited due to their need for independence and/or financial risk avoidance. Attorneys have the best vision for navigating and satisfying the legal process. Yet law firms are rarely staffed to conduct financial due-diligence, perform strategic planning, review/restructure business processes, provide crisis management or provide any other “hands-on” business expertise. Even if accountants, consultants and attorneys did provide it all, their services are tied to billable hours rather than the client’s success. None of the above professionals specialize in restructuring and financing emerging or underperforming companies in a “one stop” turn key fashion.
The reasons for involving a merchant banker are:
A good merchant banker should have a seasoned perspective and long term view of the markets for the company and be able to determine a reasonable range of business contingencies and outcomes that will provide the most informed assurance for success. Merchant bankers for emerging and underperforming companies should also have the near term perspective of how illiquidity, restructuring, reorganization and legal threats should be managed. The biggest threats to a company are the threats that are: 1) unseen, 2) unknown, 3) misunderstood or, worst of all, 4) seen, known and understood but not well managed.
When involving any professionals, company management has to be careful to not “clone” themselves. While this makes for a very harmonious relationship, people that see things the same way also miss the same things. Don't expect a "yes man" in any professionals you retain unless you like surprises. The best accountants, attorneys, bankers, consultants and advisors just want to see management goals achieved as guided by their particular knowledge of finance, laws, markets and/or operations. Since merchant banker compensation is tied primarily to solutions, collaborative objectivity is the only practical method of developing the best solutions.
A third party is generally much more effective than the company owners/managers in negotiating material external arrangements such as divestitures, credit facilities, or corporate reorganizations. While the merchant banker certainly will not know as much about the company as the owner, he can, unlike the owner, solicit interest and/or alternatives without causing the owner to appear overeager. The merchant banker is also better suited to develop and manage discussions with multiple buyers, credit providers or stakeholders to create momentum and competition which can enhance the factors for a favorable financial outcome. The ability to feel out the emotional climate of all parties provides a more realistic evaluation environment and an unemotional buffer for both the company owner and external stakeholders.
Confidential Market Access
A seasoned merchant banker will be aware of prospective strategic relationships and alliances as well as industry best practices that can benefit the client company. In the long term, merchant bankers can also assist management in positioning itself in the most favorable position to attract favorable capital and/or optimize the sale of a rehabilitated company. Knowledge of the market is developed over years of experience. A merchant banker can discreetly solicit strategic opportunities without disclosing the identity of the company.
One of the classic mistakes made by emerging and underperforming companies is to simply react to events by searching for solutions only in its immediate sphere of influence or by responding to inquiries by suitors. There is a better way to go! The company management should be running the show and presenting the company in the most fair and favorable light to potential outside investors. The actual process of reorganizing the company helps to ensure that the management knows that it is pursuing the right strategies and not simply the path of least resistance. For example, one principal’s client determined that a strategic sale was the best option and received offers of $28 million and $35 million. Unless the process caused the client to look beyond immediate customary markets, the company would not have received the third offer of $62 million. The only method for avoiding the “buyer’s remorse” syndrome is thorough methodical research of markets, disciplined processes, knowledge of alternatives and planned contingencies.
Probably the most important attribute of a good merchant banker, particularly for emerging and underperforming companies, is his knowledge of the corporate restructuring roadmap. Beyond market knowledge, merchant bankers are the experts in bringing the best results. Merchant bankers have a macro focus on enterprise value and all the prioritized components necessary to realize the best enterprise value. This expertise preserves value in an emerging or underperforming situation and drives ultimate enterprise value which enables companies to avoid blind alleys, wasted resources and potential liquidation.
Success in any given endeavor is driven by options. The fewer options that companies have, the less likely that success will occur. Both emerging and underperforming companies function with far fewer options than their established larger counterparts. Market statistics suggest that companies that manage change well are the most likely to succeed. For example, of the original 12 leading companies that Charles Dow listed in 1896 to form what is now known as the Dow Jones Industrials “blue chip” stocks, only General Electric remains today. Only GE and Exxon remain of the leading 30 listed in 1930 while only 13 of the 30 listed in 1980 remain in 2005.
Market statistics also indicate that change is hard to successfully manage. Market statistics such as those developed by Dun and Bradstreet consistently indicate that 85% of all second generation businesses fail. Market statistics also show that almost 90% of all corporations that attempt to reorganize through a Chapter 11 proceeding fail to exit bankruptcy and are liquidated. New bankruptcy laws effective October 2005 will severely compress the timing and flexibility of reorganization options and will contribute to an even higher rate of failure.
The broad markets indicate that it is all about the quantity and quality of real options. Real options that a company can identify, develop, maintain and manage well over time enables it to manage change well. Consistently well managed change over time leads to the greatest success.
We believe our expertise and market knowledge can consistently offer viable options to our merchant bank clients, particularly those options that assist our clients in their quest for enduring economic success.