SELLING A BELEAGUERED COMPANY NOT ALWAYS BEST SOLUTION

David Merrefield

Why is it that when companies are in extreme duress, such as being in the throes of sinking sales and fading profitability, that the way out so often devolves to selling the company?

After all, if selling is a viable option, that means there is some entity that perceives more value in a challenged company than do its current owners. If a company really is in such poor condition that no entity is interested in buying it, then it will fade away. But in instances where a sale is possible, the entity likely to take the plunge and become the buyer is an investment firm (to continue with last week's theme). Let's take a look at why that is.

First, though, let's note that there are often good reasons why selling is the best option. In the instance of companies owned or largely controlled by a single family, selling may appear to be a good course because that obviates the all-too-common necessity of somehow deciding which family member should undertake the ugly chore of weeding from the company other family members - those that might be incompetent, prone to squander company funds or who are without portfolio.

Absent factors such as those that hamstring management, selling to an investment company isn't always the best idea since what the new owner will do is to somehow restore the acquired company, then resell it in whole or part. That endgame often yields vast amounts of profit to the new investors - profit, it might be argued, that could have gone to the company's original shareholders had its management done the restoration instead of selling.

As was pointed out in a news article in the Wall Street Journal not long ago, shareholders seem to be coming to such a realization and sometimes are standing in the way of proposed sales to investment firms. The most prominent example the article cited was the shareholder revolt that surrounded the sale of VNU, the owner of ratings-service Nielsen and of numerous publishing assets. In an unusual move, shareholders blocked the sale of the company to a private-equity consortium for a time, eventually winning a small premium to the originally proposed sale price. A $10 billion deal for the company was completed last month.

The article also cited the obvious fact that managers of beleaguered companies may find selling leads to greater and more immediate personal enrichment than would the chancy and laborious business of restructuring in a quest for renewed profitability. The article made no mention of this, but the food distribution business offers obvious examples of companies that have been sold in lieu of previous management doing what the buyers will do and of family-controlled companies sold as relatively painless restructuring devices. Let's cite a possible example of each. Typifying the former is the now-dismembered Albertsons; of the latter is Marsh Supermarkets, the sale of which is pending.

Finally, it should be acknowledged that many transactions are initiated because of prodding by investment funds themselves. As was noted in these pages last week, Ahold, based in Holland, is being importuned by a couple of hedge funds to divest itself of its sizable holdings in the United States to become a Europe-centric company.