Blog of Intellectual Capital

An Obituary printed in the London Times…….Brilliant!!  Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years.No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as:  – Knowing when to come in out of the rain;  – Why the early bird gets the worm;  – Life isn’t always fair;  – And maybe it was my fault.  Common Sense lived by simple, sound financial policies (don’t spend more than you can earn) and reliable strategies (adults, not children, are in charge).  His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition. Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children.  It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.  Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims.  Common Sense took a beating when you couldn’t defend yourself from a burglar in your own home and the burglar could sue you for assault.  Common Sense finally gave up the will to live, after a woman failed to realise that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.  Common Sense was preceded in death,  -by his parents, Truth and Trust, -by his wife, Discretion, -by his daughter, Responsibility, -and by his son, Reason.  He is survived by his 5 stepchildren;  – I Know My Rights  – I Want It Now  – Someone Else Is To Blame  – I’m A Victim – Pay me for Doing Nothing Not many attended his funeral because so few realised he was gone.  If you still remember him, pass this on. If not, join the majority and do nothing.

Apart from a formal bankruptcy (Chapter 7 or 11), there are two basic approaches to maximizing enterprise value for underperforming and/or under-capitalized technology, life science, medical device, digital marketing, information & cyber security and solar companies and their Intellectual property:  “Date-Certain M&A Process” and an Assignment for the Benefit of Creditors (ABC).

Both of these processes have significant advantages over a formal bankruptcy in terms of speed, cost and flexibility. Gerbsman Partners’ experience in utilizing a “Date Certain M&A Process” has resulted in numerous transactions that have maximized value anywhere from two to nine times what a normal M&A process or “ABC” would have generated for distressed assets. With a “Date-Certain M&A Process”, the company’s Board of Directors hires a crisis management/private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets.

The advisor works with the board and corporate management to:

1. Focus on the control, preservation and forecasting of CASH.

2. Develop a strategy/action plan and presentation to maximize value of the assets, including drafting sales materials, preparing information due diligence war-room, assembling a list of all possible interested buyers for the IP and assets of the company, and identifying and retaining key employees on a go-forward basis.

3. Stabilize and provide leadership, motivation and morale to all employees.

4. Communicate with the Board of Directors, senior management, senior lender, creditors, vendors and all stakeholders in interest. The company’s attorney prepares very simple “as is, where is” asset-sale documents (“as is, where is – no reps or warranties” agreements is very important as the board of directors, officers and investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors, investment bankers and lawyers in Europe, Israel, China, Australia, India and the US). It also includes the coordination of their interactions with company personnel and the arrangement of on-site visits. Typical terms for a “Date Certain M&A” asset sale include no representations and warranties, a sales date typically three to four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $200,000 range to bid, and a strong preference for cash consideration and the ability to close the deal in 7 business days. Date Certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the Board of Directors may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid.

5. The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is five to six weeks. Such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program, D&O insurance and dissolving the corporation etc.

The advantages of this approach include the following:

Speed – The entire process for a “Date Certain M&A Process” can be concluded in five to six weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.

Reduced Cash Requirements – Given the Date Certain M&A Process’ compressed turnaround time, there is a significantly reduced requirement for investors to provide cash to support the company during such a process.

Value Maximized – A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the ‘tire-kickers.’ In our experience, this process tends to maximize the final value received.

Cost – Advisor fees consist of a retainer plus an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.

Control – At all times, the board of directors retains complete control over the process. For example, it can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.

Public Relations – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.

Clean Exit – Upon closing of the auction, considerations received are distributed and the advisor, under the leadership of the insolvency counsel, then takes all remaining steps to effect an orderly shut-down of the remaining corporate entity. To this end, the insolvency counsel then takes the lead on all orderly shutdown items.

In an Assignment for the Benefit of Creditors (ABC), the company (assignor) enters into a contract by which it transfers all rights, titles, interests, custody and control of all assets to an independent third-party trustee (Assignee). The Assignee acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors. We feel that an ABC is most appropriate in a situation with one or more highly contentious creditors, as it tends to insulate a board of directors from the process. Nevertheless, we have found that most creditors are rational and will support a quick process designed to maximize the value that they receive. A good advisor will manage relationships with creditors and can often successfully convince them that a non-ABC process is more to their advantage. Apart from its one advantage of insulating the board of directors from the process, an ABC has a number of significant disadvantages, including:

Longer Time-to-Cash – Creditors and investors will not receive proceeds for at least 7 months (more quickly than in a bankruptcy but far slower than with a “date-certain” auction).

Higher Cost – Ultimately, ABCs tend to be more expensive than a “Date-Certain M&A Process”. It is not uncommon for the entire value received from the sale of company assets to be consumed by fees and/or a transaction for maximizing value may not be consummated in a timely fashion.

Loss of Control – Once the assets are assigned to the independent third-party trustee, the board of directors has no further control over the process. It cannot modify the process in any way or discontinue the process. Thus, it is not possible to explore multiple options in parallel.

Higher Public Relations Profile – The longer time frame for the ABC process and the more formal (and public) legal nature of an ABC make it more difficult to put a positive spin on the final outcome.

Messy Exit – Most independent third-party trustees do not perform the services of cleanly shutting down the remaining corporate shell. Thus, investors must either pay another party to do this job or leave it undone, resulting in increased liability.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 115 technology, medical device, life science, digital marketing, information & cyber security and solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, Virginia/Washington DC, Boston, Europe and Israel.

Advantages of ‘Date-Certain M&A Process over Standard M&A’

Every venture capital investor hopes that all his investment will succeed. The reality is, however, that a large percentage of venture investments eventually are shut down. 

In the extreme they end in bankruptcy or assignment to creditors. The majority falls into the category of the “living dead.” Such companies are not complete failures, but their prospects do not justify continued investment, yet they are rarely shut down quickly.

Once reality has been recognized, most investors engage investment bankers to sell their investment off through prevailing M&A processes. Unfortunately, seldom with good results.

REASON #1

The main reason for that sad result is a fundamental misunderstanding of buyer psychology. In general, buyers act quickly and pay the highest price only by force of competitive pressure. 

Potential buyers of the highest probability are those already familiar with the company for sale, such as competitors, existing investors customers and vendors. Once a sales process starts the seller is very much a diminishing asset. Both financially and organizationally.  Unless compelled to act, potential buyers simply start to draw out the process, submit a low-ball offer when the seller runs out of cash, or try to pick up key employees and customers at no cost. 

REASON #2

The second reason is usually a misunderstanding of the psychology and methods of investment bankers.

Most investment bankers do best at selling “hot” companies. Companies whose value is perceived by buyers to be increasing quickly over time, and where there are multiple bidders.

They tend to be more motivated and work harder on such cases because transaction sizes –and resulting commissions– are larger and surrounding publicity can bring in new assignments, among others. They also tend to be more effective in maximizing value in such situations by using time to their advantage, pitting buyers against each other and setting very high expectations. 

In a situation where time is not your friend, the actions of standard investment banking practices often make a bad situation much worse. Such actions include assigning less experience B-Teams to smaller transaction size cases, “playing out the process” which works against the seller, and pitting multiple players against each other which can drive away potential buyers who often know far more about the seller than does the banker.

THE GERBSMAN PARTNERS ‘DATE-CERTAIN’ M&A PROCESS

The most effective solution in situations where time is not on your side is a Date-Certain Merger and Acquisition Process. 

Under this proprietary process, the company’s board of directors hires a crisis management/private investment banking firm (‘advisor’) to wind down business operations in an orderly fashion and to maximize the value of their intellectual properties and tangible assets. The Advisor works closely with board and corporate management to:

Focus on Control, Preservation and Forecasting of CASH

Develop a Strategy/Action Plan and Presentation to Maximize Value of Assets.

Plans to include Sales Materials, Due Diligence access. a list of all possible Interested Buyers for Intellectual Properties and Assets and Identify and Retain Key Employees on a go-forward basis.

Stabilize and provide Leadership, Motivation and Moral to all Employees.

Communicate with the Board of Directors, Senior Management, Senior Lender, Creditors, Vendors and all other Stakeholders in Interest.

THE PROCESS:

The company attorney prepares a simple “As-Is/Where –Is” asset sale documents. This document is very important and includes a “No-Reps or Warrantee” Agreement, as the board, officers and investors typically do not want any additional exposure on a deal. 

The advisor then follows up systematically with ALL potentially interested parties and coordinates their interactions with company personnel, including on-site visits. 

Typical terms for a Date-Certain M&A asset sale exclude representations and warranties and include a sales date –typically four to six weeks – from the point of readying sales materials for distribution, a refundable CASH deposit in the range of $200,000, a strong preference for cash consideration and with the ability to close a deal in seven business days. 

Date-Certain M&A terms can be varied to suit needs unique to given situations. For instance, the board may choose not to accept any bids, or to allow re-bids if there are multiple competitive bids, and/or allow early bids. 

The typical workflow timeline from advisor hiring to transaction close and receipt of consideration is four to six weeks. Such timelines may be extended as circumstances warrant. Upon receipt of considerations, the restructuring/insolvency attorney then distributes funds to creditors and shareholders (if there is sufficient consideration to satisfy creditors), and takes all needed steps to wind down the remaining corporate shell. Typically in coordination with the CFO.

PROCESS ADVANTAGES:

Speed:   – The entire Date-Certain M&A Process can typically be concluded in 4 to 6 Weeks. Creditors and investors receive their money quickly. A negative PR impact on investors and board members related to a drawn out process is eliminated. Where required, such timelines can be reduced to as little as two to three weeks, however severely compressing the process often impacts the final value received during asset auction.

Reduced Cash Requirements:  – Owing to the Date-Certain M&A process’ compressed turn-around time, there is a significantly reduced need for any additional investor cash to support the company during the process.

Maximized Value:  – A quick and effective process during wind-down mode minimizes strain and rapid asset depreciation and thereby preserves enterprise value. The fact that an auction will occur on a certain date typically brings truly interested and qualified parties to the table. In our considerable experience, this process strongly aids in maximizing the final value received. 

Cost:  – Advisory fees consist of a retainer and a performance fee, which is a percentage of the sales proceeds.

Control:  – At all time during the process, the board of directors retains complete control. For instance, it can modify the auction terms, or discontinue the auction at any point, thereby preserving all options for as long as possible.

Public Relations:  – As the entire sales process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all terms kept confidential. Accordingly investors can list the company in their portfolios as sold vs. having gone out of business.

A Clean Exit:  – Upon closing of the auction, considerations received are distributed and the advisor, under the leadership of the insolvency counsel, then takes all remaining steps to effect an orderly shut-down of the remaining corporate entity.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 115 companies in a wide and diverse spectrum of industries, ranging from technology, life science, medical device, digital marketing, consumer to cyber security, to name only a few.

Since inception in 1980, Gerbsman Partners has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has been involved in over $2.3 billion of financings, restructuring and M&A transactions.

Gerbsman Partners has offices and strategic alliances  in San Francisco, Orange County CA, Boston, New York, Washington  DC, Mc Lean VA,  Europe and Israel.

Our Rabbi and dear family friend passed away last night.

Rabbi Daniel Weiner (son) wrote “Rabbi Marty Weiner passed away peacefully and painlessly last night, before a majestic view as the lights went down in the City by the Bay he loved so much.  He was nestled in the warm embrace of family that continuously let him know how much they loved him and how much he had given to them. זכר צדיק לברכה Zecher Tzadik Livracha–May the memory of the righteous be a blessing”.

Marlene, Jason and I met Marty the month we we moved to Marin, at the Briss of Jordan Weiss – son of our friends, Dan and Lisa Weiss.  From that day on, Marty was our spiritual leader and friend.  Marty was the Rabbi at the Bar Mitzvah of Jason;  went to Israel to meet with Jason in Jerusalem when Jason served in the IDF in Gaza during the second Intifada; and married Jason and Lauren in Florida (Marty told Marlene and I that other than his children, Jason and Lauren are the only other people he traveled to out of SF to marry ) 

Our grandson Judah was a Bar Mitzvah last month and during the ceremony our Rabbi’s spirit was there blessing him.

Our hearts are heavy for the loss.  

To the Wiener family, please know that Marty will be in our hearts and mind forever.

Shalom my friend 

The Gerbsman Family

The Black Swan Pushes Events to the Tipping Point-Maximizing Enterprise Value in Crisis times

This article was published by Steven R. Gerbsman and Robert Tillman in previous years and has significant relevance today due to the Russia/Ukraine situation, inflation and Covid. Please read, enjoy and “be prepared”.Best regards,  Steve Gerbsman and Bob Tillman (Bob is an Member of Gerbsman Partners Board of Intellectual Capital, an Investor and Entreperneur). We are currently in one of the most challenging times in our country’s history. The stock market had hit at all-time highs and now suffers from higher interest rates, inflation and world political turmoil. There are, of course, many other worrisome trends: terrorism, excessive government spending, trade deficits, high oil prices, immigration and over the longer term, such issues as an aging population and (possibly) global warming. Although problems and worries always exist, in historical terms, these are times of challenges. The big questions for us as specialists in maximizing enterprise value are: When will the Black Swan and Tipping Point issues end? It will eventually end of course. Even fundamentally healthy economies experience frequent and often violent corrections. The current world economy has evolved in many ways over the past decade. All large businesses are international. The primary economies of the world are very tightly linked together. Money is far more liquid and moves around the world with far less “friction” than it did in the past. The pace of technical change continues to increase. Nevertheless, we do not believe that the laws of history, and especially, the laws of human nature, have been repealed. As always, “The more things change, the more that they remain the same.” Unfortunately, no one knows the answer to this question. In historical terms, the current economic expansion has continued for a very long time and has survived numerous shocks, including war, a doubling of energy prices, natural disasters and localized economic downturns, such as the bursting of the sub-prime mortgage bubble. The markets are now “ripe” for a downturn. On the other hand, inherently unstable situations often persist for far longer than anyone could believe possible. During the 2000 Internet bubble, it seemed to us for quite some that the old rules of business no longer applied and that 25 year-old CEOs knew something us old guys did not know. When the crash occurred, we were relieved to find out that we were not so obsolete after all. We did, however, underestimate the staying power of technically insolvent companies with broken or non-existent business models. Many of these companies had significant cash on the balance sheet (offset, of course, by significant liabilities) and investors who continued to infuse more cash far beyond the point of reason. Today, there exist immense pools of uncommitted cash, much of it in the hands of entities, such as private equity funds and hedge funds that are subject to minim al regulatory scrutiny and whose operations are obscured from the public view. In addition, the weakness of the dollar against both the Euro and the Pound Sterling makes U.S. assets a relative bargain. These factors tend to mitigate against an economic downturn. For how much longer they will continue to do so we do not know (and if we did know, we would certainly would not tell). How will it end? Fast, hard and unexpectedly. Three books shed a great deal of light on the process:The first book, The Tipping Point by Malcolm Gladwell describes how human behavior causes events to cascade rapidly once a certain critical mass (the “Tipping Point”) has been achieved. Examples in the business world include periodic economic ?panics? and the spread of certain technologies and products, such as personal computers, iPods, cell phones, etc. It is very difficult to predict in advance when the ?tipping point? in any situation will be reached, but history has shown that, once it has been reached, events proceed very quickly. The second book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb describes how highly improbable, and hence unpredictable, events periodically create massive change. The title of the book derives from the observation that the existence of even a single black swan disproves the assertion that all swans are white. Historical examples include the Fall of France at the beginning of World War II, the rise of the Internet and 9/11. The third book, “The Sun Also Rises” by Ernest Hemingway describes the character Mike Campbell and discusses his money troubles where he responded with a vivid description embracing self-contradiction.  “How did you go bankrupt”, Bill asked.  “Two Ways”, Mike said.  “Gradually and then Suddenly”.  “What brought this on?”.  “Friends,” Mike said.  “I had a lot of friends.  False friends.  Then I had creditors, too.  Probably had more creditors than anybody in England.” There are many obvious candidates for a “black swan” event that pushes the world economy over “the tipping point” into a downturn – a war with Iran, Russian, Korea and/or China over Taiwan, a nuclear terrorist attack or the coninutaion of the Covid epidemic, but generally, it is what you do not see that gets you. We are fundamentally optimists about the long-term prospects of the world economy. In many highly measurable ways, the world really is improving, driven by technological innovation, a lowering of barriers to trade and increasing economic integration. Nevertheless, we are old enough to have lived through many “bumps” along the road and know that such discontinuities will always occur. We believe that we will see a significant economic event sometime over the next 6-18 months, either localized to a particular sector or geographic region or globally. Gerbsman Partners Advice? Before such an event occurs: As a board member, investor, senior lender or stakeholder: 1. Implement tight cash flow, receivables and inventory reporting so that you are alerted to problems early. 2. Focus on the control, preservation and forecasting of CASH on a weekly, monthly and quarterly basis. 3. Require “bottoms up” forecasting for all aspects of revenue and expense. Have the CEO and CFO defend ALL numbers. 4. Hold the CEO responsible and accountable for Performance. If you are off the business plan/forecast, re-forecast based on the reality of “what is” today. 5. Communicate frequently with all parties at interest. Check that the CEO is providing leadership, motivation and morale to the management team and employees. 6. Review all companies in your portfolio. Identify and define action plans to fix weaknesses now. 7. Utilize professional resources to assist in maximizing enterprise value, when appropriate. When such an event occurs: 1. Face up to reality and act quickly. When things are going bad, waiting seldom improves them. We have never seen a board of directors act too quickly when faced with a crisis. We have all too frequently seen a board act slowly or not at all. 2. Call for assistance early. The earlier professionals can get involved in the process, the better the potential outcome in maximizing enterprise value. Many times boards request assistance only after a company has run out of cash. Many more options exist to maximize enterprise value if a company has some running room. About Gerbsman Partners  Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 115 companies in a wide and diverse spectrum of industries, ranging from technology, medical device/life science, digital marketing to cyber security, to name only a few.* In the process, GP has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has assisted in over $2.3 billion of financings, restructurings and M&A transactions.*  Gerbsman Partners has offices and strategic alliances in San Francisco, Orange County, Boston, New York, Washington DC, McLean, VA, Europe and Israel. * For further information on Gerbsman Partners expertise and industry experience, please request our company profile here