THE M&A JOURNAL THE INDEPENDEN T REPOR T ON DEALS AND DEALMAKERS Volume 8 Number 6 A conversation with . Katten Muchin Rosenman Todd J. Emmerman is chairman of the firm’s Howard S. Lanznar is chairman of the Corporate and Securities Practices in New National Corporate Practice at Katten Muchin York. He advises public and privately-held Rosenman LLP. His clients include publicly- buyers and sellers and their boards of directors held corporations, institutional investment (and committees of independent directors), funds, family businesses and entrepreneurial securities issuers and investors, investment growth companies. He represents both pur- bankers, joint venturers and other transac- chasers and sellers in all types of M&A. His Todd Emmerman tion participants in a variety of M&A, financ- practice concentrates on leveraged buyouts, ing (including PIPEs) and other transactions, public tender offers and mergers, acquisitions including contested transactions, tender offers, of companies operating in regulated industries, proxy solicitations, going private transactions, and acquisitions or sales of businesses in finan- leveraged recapitalizations and reverse merg- cial distress or bankruptcy. Mr. Lanznar gradu- ers. Mr. Emmerman received his B.S.B.A., ated magna cum laude from Amherst College, with honors, from Boston University School of where he was elected to Phi Beta Kappa. He Management in 1987 and his J.D from Boston received his law degree from the University of University School of Law in 1990. He is admit- Chicago Law School, where he was a member ted to practice in New York. of The University of Chicago Law Review and was elected to the Order of the Coif. Howard Lanznar FROM BOOM TO BUST? you can’t do that in your education and then in practice without being somewhat conservative. Q: So, the M&A boom is over. What were the Those of us who represent entrepreneurs are warning signs? always astounded at our clients—at the guts that they have had and the risks that they take. Pretty HOWARD LANZNAR: One of my tests for much anybody you know—other than those who when the market has reached a peak is when have inherited it—has either gone bankrupt or lawyers start departing law firms in droves to go come close to it. A lot of us sit back later on after to investment banks. It just tells you that the end those clients are successful and say, ‘I could have is near. By the time lawyers start chasing it, it is done that—but I didn’t.’ already gone. Lawyers by nature don’t tend to be on the cutting edge. TODD EMMERMAN: We’d all been hearing for a long time, for a good year before it hap- Q: You guys are a cautious lot. pened, that leverage was going to be the downfall of the boom. Some say that it has yet to even hit us MR. LANZNAR: I think that it is inherent in full, but it certainly has proved to be true that in the training, in what are you forced to think there was too much easy money out there. This about as a lawyer. You are not doing your job enabled buyers, primarily private equity firms, unless you’re thinking about all of the permuta- to pay what now might be viewed as excessive tions, including the downside permutations, and Katten Muchin The M&A journal haps mis-priced or perhaps overpriced targets, Katten Muchin at least temporarily, but nobody would question continued that these companies that are being bought out or sold are viable, strong operating companies. So, prices, to apply excessive valuations to some of you don’t have fundamental operating issues— the companies that they were purchasing, simply you have capital structure issues and, in the last because they could get the financing. So when few months, not even those issues, but simply the you back away from the easy money now, you question of a lack of liquidity. Companies are not can say, ‘Okay, this opens the door for strategic upside down financially. It is just that the markets buyers. It opens the door for public companies have seized up over the summer and liquidity has that might be able to use their stock as currency, become very difficult. and hopefully to make good decisions as a result of being beholden to their stockholders.’ Q: That is certainly different from a lack of any Like any other market change, it creates an real company or a lack of any real business plan. opportunity, a change in the dynamic. There will be new players that will be able to benefit from it. MR. LANZNAR: Exactly. I think that there Whenever a bubble bursts, it creates opportunity will be some pause and there may be some adjust- for those who are still alive to figure out how to ment in pricing and valuation, but you are not pick up the pieces. When something of this mag- going to see entire companies or even sectors just nitude occurs, it has an impact beyond what you go up in smoke the way that happened in 2001 might initially see. It does impact the economy, and 2002. The other thing is that makes me more the feds are making adjustments, and the govern- bullish about this downturn is that there is just so ment is reacting in order to try to minimize the much more liquidity, so much more capital out effects of that ripple. There is a lot of debt out there. Capital movement is almost instantaneous there, whether it is related to mortgages or not, across global borders. There is a safety net. These that possibly should not have been placed on massive amounts of capital will seek opportuni- the terms that it was placed, and as time goes by ties for above average returns wherever those and that debt and those companies begin to have opportunities may be. In previous downturns, trouble servicing that debt, you are going to see a the capital market wasn’t nearly as deep and as bit of a shakeout, which I think is going to create broad as it is now, nor as sophisticated. So, for an opportunity for buyers of distressed compa- example, you’ve got this huge market of credit nies and opportunities for new lenders who are default derivatives where if you are a lender you going to come in and make loans to restructured can actually go into the derivatives market and entities. Just like the dotcoms, the good ideas sur- hedge your exposure to a loan whether it is to vive, the companies with solid business plans get a particular company or to an industry. There through it. Time will march on. There will be new is some other party out there that will allow a players. A new bubble will begin to inflate. lender or an investor to offload a substantial amount of risk, and the more that happens, the MR. LANZNAR: I have professionally lived more that frees up liquidity and, frankly, if things through several downturns. I think you can see go wrong, it spreads the risk. some similarities between this one and those that The reasons behind any change always seem have gone before, but I also think that there are so clear afterwards. Nobody sees it coming—or, fundamental differences. Unlike the downturn at least, they may see it coming but only jokingly, of 1991 and 1992, you have got a generally strong and they are willing to continue to drink the economy still, which will make up for a lot of Kool-Aid all the way up until the end. It may be issues that are created by any temporary liquid- that the sub-prime mortgage debacle happened ity crunch. Although you have very high prices to be the straw that broke the camel’s back. It being paid in LBOs, as well as aggressive financ- had a disproportionate impact. I think you had ing terms, even the most aggressive deals are con- over-hyped or overstretched credit markets for servatively capitalized compared to the first wave months and they were looking for a trigger to of buyouts in the 1980s, where you had deals with pull back some. And it happened to be the sub- 10 to 20 percent equity. That would be unheard of prime crisis. in today’s market. So there is more cushion in the For months, you could look at certain deals, at system. A fundamental difference between this the terms and the pricing, and if you happened downturn and the tech period in 2001 and 2002 is to know the company, you said, ‘Boy, this must the fact that at that time you didn’t have underly- be an indication that we are at the top of the ing real companies. Here the issue may be per- market.’ 2 the M&A journal MR. EMMERMAN: The dotcom bust was been as profound. Deals are moving more slowly, about Joe Public. This time, we’re talking about but deals are going to get done. I think that you the impact on the M&A industry and, in particu- are going to see a reset of expectations as to valu- lar, the hedge funds, where this will have a huge ation, although that always takes a while because effect. Everybody and their brother have been people don’t understand why their company’s starting a hedge fund and turning in high returns value should drop. It is interesting that sellers and getting rich, mostly by utilizing leverage. It is have no problem letting their expectations go up the hedge fund people that have been making the quickly—nobody likes to think of going down.