A Blog from Gerbsman Partners Board of Intellectual Capital on “Maximizing Enterprise Value” for technology, life science, medical device and cleantech companies and their Intellectual Property
As we begin Veterans Day/Week 2021, we say “Thank You” to the men and woman of our armed services and suggest that it is time for all to “step up” and find ways to support our Veterans. To often we say “thank you for your service” and then do nothing more. Please think about supporting various Veterans groups with donations, food, clothing and moral support. They have “Earned” it and we “Owe” it to them. Hopefully our leaders in Washington DC will focus more one these Veterans then illegal aliens.
In the late summer of 1967, I was on my way back to Basic Training at Fort Dix, N.J. I was in New York City and an older couple came up to me and said “Thank You” for serving and then gave me $ 20 to enjoy a dinner on them. The gentleman said he served in the Korean War and understands and appreciates what men and woman in uniform go through. I said thank you, enjoyed a great dinner and to this day, remember their kind gesture.
On this Veterans Day/Week, our family will support the Special Forces Wounded Warriors program and will provide moral support and friendship to Veterans. On 11/11/21, I will also continue to remember that couple and honor them by buying dinner for soldiers in uniform. I will ask them to do the same thing, 5, 10, 20 and 40 years later.
May God Bless our troops and provide our leaders with the courage and strength to do what is Right and what is Just.
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:
Focus on the control, preservation and forecasting of CASH.
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.
Stabilize and provide leadership, motivation and morale to all employees.
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.
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 significantdisadvantages, 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 114 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.
2021 has been a banner year for M&A in the technology sector. In Q3 alone, according to 451 Research, there were 1170 technology deals for a total deal value of $341B. Even with Zoom pulling its $15B bid for Five9, the 2021 total tech M&A deal value is on track to reach $1 trillion by the end of October. With the high-tech transactions over the amounts of available capital, increased competition, and innovative technologies, elevated valuations and deal activities are expected to continue through the end of the year, at least. In 2011, many PE firms were focused on more traditional sectors outside of technology; fast forward ten years and PE firms are actively seeking platform and add-on investments in tech. In 2011, one in ten technology deals involved a PE firm or a PE-backed portfolio company; thus far, in 2021, one-third of deals have involved a PE firm. Buyout shops and their portfolio companies have announced over 9,100 transactions in the last decade. In addition, with the need for PE firms to put their record amounts of capital to work, combined with some of the most receptive loan markets, Q3 tallied the most PE deals in history, with PE firms expected to continue as influential candidates in all tech M&A discussions.
Q3 2021 ViewPoint Released
Our Quarterly ViewPoint for the quarter ended September 30, 2021, has been released. The ViewPoint is a summary of trends, stock index performances, public valuation multiples, and relevant M&A activity in the services, software, and communications sectors.
Andy Agrawal Managing PartnerDecisionPointo: 704.759.6162 f: 704.973.7800
Love the classic sounds of Frankie Valli, The Drifters, The Del Vikings? Ever wonder what Maroon 5 would sound like if they had lived in the Doo Wop era?
The Doo Wop Project begins at the beginning, tracing the evolution of Doo Wop from the classic sound of five guys singing tight harmonies on a street corner to the biggest hits on the radio today. In their epic shows DWP takes audiences on a journey from foundational tunes of groups like the Crests, Belmonts and Flamingos through their influences on the sounds of Smokey Robinson, The Temptations, and The Four Seasons all the way to DooWopified versions of modern musicians like Michael Jackson, Jason Mraz and Maroon 5. Featuring stars of Broadway’s smash hits Jersey Boys and Motown: The Musical, the Doo Wop Project brings unparalleled authenticity of sound and vocal excellence to recreate—and in some cases entirely reimagine—some of the greatest music in American pop and rock history!
We went to see them last night with friends and “they rocked the night away”. A must see.
A unique graduate school for Diplomats, Warriors and Spies
John Lenczowski may be the greatest American national security strategist you never heard of. His reputation has never gone much beyond the beltway. Yet, as President Reagan’s NSC Advisor for European and Soviet Affairs from 1983-87, he was among the principal architects of the Cold War strategy.
Led by the United States, the West defeated the Soviet Union and liberated millions of souls in one of the greatest victories of modern history. That it ended with a whimper and not a bang is a testament to an extraordinary Grand Strategy, including a wide range of hard and soft power in a coordinated effort to defeat the adversary economically, technologically, diplomatically, militarily, but also psychologically, by winning hearts and minds of entire populations behind the Iron Curtain. This is how to win without war, which the ancient Chinese strategist Sun Tzu deemed the acme of skill.
Based on his experience, in 1990 forward-thinking Lenczowski founded The Institute of World Politics (IWP), a fully accredited independent graduate school of national security, intelligence, and international affairs. He saw that no school was teaching coordinated grand strategy in any comprehensive way, and that this was vital to overcoming the silo effect of insulated policy makers in the defense, intelligence, diplomatic and other agencies, as well as the legislative branch.
Lenczowski also wanted his students to have a clear-eyed view of the global strategic environment, an appreciation for American history and founding principles, and a sound foundation in ethics and character formation. He wanted to educate informed patriots, under the belief that one cannot defend a country that one does not understand and love.
A crown jewel of IWP is the 45-member faculty, comprised almost entirely of scholar-practitioners, who have deep practical experience in the arts of statecraft they teach. Many possess rare and precious knowledge of statecraft arts which have been poorly resourced or otherwise neglected since the end of the Cold War, including for example counterintelligence, public diplomacy, and strategic influence, so critical today with the revival of great power competition.
Like many brilliant ideas, the intellectual architecture of the Institute seems obvious after the fact. Yet IWP is virtually alone in its comprehensive curriculum and faculty composition.
Today hundreds of the school’s alumni are serving in some of the most sensitive leadership positions in the national security arena. They have helped author recent National Security and National Defense strategies, commanded all the land troops of NATO, led a highly successful effort to stop the theft of intellectual property in Silicon Valley, and won the highest FBI agent awards, among many other achievements.
This month The Institute of World Politics celebrates its 31st anniversary. Cold War architect John Lenczowski is stepping aside as President but remains as Chancellor. IWP demonstrates that leadership and expertise in national security may flow from wellsprings far removed from the brand-name universities. The courage and vision of one man devoted to the essence of Western values and democratic principles will persevere — and help to shape the next generation of young leaders educated in the arts of effective statecraft.
The Hon. James Anderson is President of The Institute of World Politics and former Deputy (and then Acting) Under Secretary of Defense for Policy. John Lovewell is Chairman of IWP’s Board of Trustees.
Blog of Intellectual Capital 