Beating the downturn

A company going into distress because of poor management is one thing, but what happens when a whole sector has been hit by the downturn? Or, worse still, what happens when poor management comes on top of a downturn? That's what 200 corporates and financial specialists from all over Germany convened to discuss in Dusseldorf earlier this week at Mergermarket's Mergers & Acquisitions and Restructuring Forum.

The crisis in the car industry has claimed its share of victims, and some have been luckier than others. One of these is Honsel, a century-old German light metal component manufacturer for the automotive sector that narrowly escaped insolvency. Honsel Chief Financial Officer Stefan Eck talked forum delegates through the company's actions when revenues fell by 50 percent at the end of 2008. "As soon as trouble hit, we contacted all the major stakeholders, lender groups, customers and employees. We decided to go into a standstill agreement and to work out an operational restructuring plan," he explained.

Fortunately, Honsel managed to convince its majority shareholders to contribute fresh money, its lenders to waive a huge portion of the company debt and its customers to help with price guarantees and loans. Although the worst is over, Eck admitted that sales volumes are still low. "We're 40 percent down from our peak year so recovery is slow, but we have stabilized the company. Now we have to be patient and wait for the market to come back," he remarked. Eck had the following advice for distressed companies: "Don't drag things out. As soon as you get into problems, talk to all the stakeholders involved, act early and act professionally."

Ruwel is another German car component manufacturer to suffered a 50 percent drop in sales at the end of 2008. Both Honsel and Ruwel were scuppered by the automotive crisis, rather than a bad business model, but that is where the similarities end. Ruwel's shareholders decided to walk away, forcing the company to file for insolvency in February 2009.

Insolvency is not the end of the world

But insolvency does not necessarily mean the end of a company; much to the relief of Ruwel's managing director Thomas Wittig. He told forum delegates how the appointment of German jurist Horst Piepenburg as insolvency administrator brought fresh hope. Piepenburg was famously taken on as bankruptcy manager last year for the insolvency of Arcandor, owner of Karstadt, Germany's biggest chain of department stores.

Despite all media predictions to the contrary, Ruwel managed to come out smiling. "From day one of the insolvency process Ruwel began actively communicating with its stakeholders and got back to positive cash results," Wittig said. Even the finance minister of North Rhine-Westphalia, Helmut Linssen, got involved in the process.

Trouble-shooters

Other companies in Germany are not only suffering from the general economic downturn, but also from their own structural problems. Aurelius and Themis Industries Group (TIG) are two financial investors that help put beleaguered companies back on their feet. Unlike many other private equity investors, these groups make their money out of the value potential in severely distressed firms unable to manage themselves effectively. Both investors had representatives at the conference who dished out tips on how to avoid financial extinction.

Blighted by years of bickering amongst its 47 shareholders, beverage company Berentzen is a case in point. If Aurelieus had not stepped in to buy the 250-year-old company, it is doubtful the business would still be around today.

Despite being faced with a company under increasing pressure from banks, financial sponsors, unions and employees, as well as 22 million euros ($30 million) in debt, Aurelieus managing director Dirk Markus still saw plenty of potential in Berentzen. He nursed the company back to profitability through focusing on a few key brands. "Historically Berentzen had more than 78 brands, some of them very small with minuscule volumes," he said. Besides streamlining production, Aurelieus also internationalized the group and started a new advertising campaign, currently running on German TV.

Recession and succession

There are many other German companies under financial strain from both the recession and succession issues, particularly older ones. "These two things combined can cause enormous problems," Markus noted. "We see a fair number of companies founded shortly after the war that need new capital and new shareholders," he added.

German businesses are particularly amenable to restructuring when the need arises, according to Christoph Kauter, CEO of TIG. "Many German management teams realize the situation is tough and they are very open to downscaling, although maybe not as rigorously and as quickly as is possible under US or UK labor law," he said.

Furthermore, the environment for making investments in Germany is becoming a lot better. In terms of deal volume, Mergermarket statistics show that M&A activity is on the rise again. "Visibility of revenues and earnings streams have massively increased compared to 12 months ago, when all sectors were showing massive revenue drops from month to month. Now we're acting much quicker and intend to do at least four acquisitions in 2010," said Kauter. Overall the mood in Germany remains positive, then, despite the odd tremor in the financial markets.

Author: Fay Sanders
Editor: Ben Knight