With a return to high market volatility this paper reflects on learnings from the Global Financial Crisis period, and how CEOs and Boards can apply those today to maximise shareholder value - despite stormy financial markets

1. Deal Making In Stormy
Capital Markets
A sense of GFC déjà vu ?
Nicholas Assef
January 2016

2. 2
With a clear sense of déjà vu the global markets have
commenced 2016 with a return to extreme volatility
Whilst we of course hope that this negative environment is short lived, the CEO and Board
of Directors always need to live by the old adage of “hope for the best, plan for the worst”
As such it is useful to reflect on a number of the factors that took place during the GFC,
and, with the benefit of hindsight, how best to position for the maintenance of shareholder
value if this volatility continues
These observations are in no specific order, and are a sample of those which were worked
through extensively with clients across the turbulence & challenges of the GFC period
I. Valuations Become Irrational
I. Valuations Become
Irrational
II. Board & Management
Paralysis
III. Higher Offshore Led
M & A Activity
IV. Balance Sheet Health
Can Change Quickly
V. Cashflow King—
Counterparty Risk Up
VI. Innovative Financing &
Refinancing
VII. Liquidity In Trading
Volumes
VIII. Activists, Short Sellers
& Private Equity
IX. Mergers For Necessity
X. Higher Quality
Dealmaking
The media love a bad news story, and turbulent markets bring amplified “alarmist” media
comment
Companies see their valuaƟons trade in wide ranges, which oŌen make tradiƟonal valuaƟon
approaches difficult. For Research Analysts covering sectors the task is difficult as the base
input assumpƟons many use for their DCF models are oŌen “fluid”. For the CEO & Board it
is difficult to ignore share price acƟon – oŌen feeling as a helpless passenger on rough seas
As noted elsewhere in this paper – the CEO must become an evangelist at these Ɵmes with
all stakeholders – internal and external. Stressing the posiƟve differenƟators as to why
their company is the “investment of choice” within its sector. Increased Ɵme and care
needs to be taken on the development of investor presentaƟons and various stock market
releases—quality over quanƟty
II. Board & Management Paralysis
During the GFC many public company Boards decided that no acƟon was the best acƟon.
Unfortunately this “no acƟon” posiƟon is actually a decision of paralysis. Comparisons such
as “we are doing the same as our compeƟtors” do not win the applause of insƟtuƟonal in-
vestors or the invesƟng community at large
ConservaƟsm should be replaced with flexibility and the ongoing search for innovaƟon
and excellence. Ongoing posiƟve communicaƟon with stakeholders of meaningful devel-
opments is mandatory. More shoe leather will be worn out in the process. All opƟons to
generate posiƟve shareholder value should be explored
Astute Boards and CEOs also know that now is the Ɵme to opportunisƟcally strike – when
valuaƟons are low and the alternaƟves for that interesƟng acquisiƟon Target are few
Strong and decisive leadership will not make the markets seƩle, but it will ensure that the
CEO’s company, its employees and stakeholders are confident that their Board and Senior
Management are commiƩed to finding a way through—and not being the proverbial
“feather blowing in the wind”
What This Note Covers :
Nicholas Assef—January 2016

3. 3
III. Higher Offshore Led M & A Activity
Currency fluctuaƟon amplifies the valuaƟon advantages oŌen enjoyed by Bidders that operate in larger more liquid capital mar-
kets. Those Bidders oŌen have higher trading valuaƟon metrics for a variety of reasons, which this paper will not go into. Suffice
to say they have a real strategic advantage as a Bidder
We have seen a material increase in offshore inquiry as the Australian dollar has fallen. We expect this trend to conƟnue – and
the advantage of those Bidders to be amplified by the volaƟlity.
For the CEO / Board under pressure it is important to ensure that they can market to internaƟonal suitors who may look for es-
tablished beachheads in countries such as Australia to launch into Asia. Astute Boards are pro acƟvely encouraging internaƟonal
strategic alliances to not only gain access to new markets at trying Ɵmes (and hopefully generate foreign currency cashflows) but
also to keep wired in to regions from where a Bidder may emerge
IV. Balance Sheet Health Can Change Quickly
CEOs & their Boards need to be acutely aware of the debt covenants inside their
debt facility agreements, and how market volaƟlity might effect them. Many facili- I recall one CFO
ty agreements are not linked to things such as share price and market capitalisa-
Ɵon – but some are during the GFC
There is nothing more problemaƟc for the CEO / Board to discover suddenly that
noting to me thatthere is a technical problem with exisƟng debt packages – and any clarifying an-
nouncement to the stock market of a problem will likely be met with extreme neg-
he was “spoilt foraƟvity. AddiƟonally, with increased counterparty risk a sensible assumpƟon, cash-
flow can be placed under pressure with liƩle noƟce.
choice” for deals asAlthough it is not what CEOs and Boards want to hear, non core asset divestments,
equity placements & debt refinancings early can ensure healthy Balance Sheets are
they had positionedmaintained through this turbulence – and can even allow expansion opportuniƟes
to be moved upon when they undoubtedly present
well, and positioned
I recall one CFO during the GFC noƟng to me that he was “spoilt for choice” for
deals as they had posiƟoned well, and posiƟoned early. With a lowly geared Bal- early
ance Sheet and cash in the bank many beat a path to his door looking for a rescue
V. Cashflow King—Counterparty Risk Up
CEOs & CFOs need to be on guard about the stability of both their cashflows and counterparƟes (clients) with whom they deal.
During the GFC many good companies quickly found themselves under pressure when it became clear that parƟes with whom
they dealt were themselves stumbling. With soŌ commodity prices and stretched project financing, the Resources sector in par-
Ɵcular becomes one where vigilance needs to be liŌed even further on counterparty relaƟonships
An eagle eye on debtors needs to be maintained during volaƟlity to ensure that cashflow stability is maintained. It can be pru-
dent to refine various operaƟonal aspects of the Company such as refining credit terms to ensure the risk profile of inbound cash-
flows does not increase
VI. Innovative Financing & Refinancing
Commercial banks oŌen become more conservaƟve in dealing with both exisƟng clients and new loans. For those public compa-
nies with loan maturing across 2016 and early 2017 geƫng started on the refinancing early is criƟcal
M & A financing can become effecƟvely more expensive as a result of lower loan valuaƟon metrics being imposed – with the eq-
uity to be provided by the Bidder increasing, and oŌen as a result making the prospect of an acceptable financial return more
difficult to achieve
Offshore lenders, foreign bond issuers, mezzanine debt funds and mulƟ faceted lenders (including hedge funds) entered the mar-
ket during the GFC, and we expect to see this trend liŌ again. There are mulƟple alternate sources of financing to the tradiƟonal
banks, and the CEO & CFO need to understand the flexibility of alternaƟves in order to properly advise their Board
Nicholas Assef—January 2016

4. 4
VII. Liquidity In Trading Volumes
For Mid Market and Small Cap public companies volaƟlity can lead to rapid illiquidity in their share trading acƟvity. An incredibly
frustraƟng situaƟon for the CEO & Board
The “flight to liquidity” oŌen means that both insƟtuƟonal and retail shareholders rotate their porƞolios to Index rated
companies where liquidity conƟnues during turbulent trading condiƟons
This shiŌ in focus also can have a knock on effect for market parƟcipants such as stock brokers, who change the focus in the way
they change the servicing of their clients from speculaƟve to conservaƟve
CEOs need to be innovaƟve in their approaches to ensure exisƟng shareholder support is maintained, and for potenƟal new
shareholders that the Company is highlighted as being an “opportunity of choice” despite irraƟonal valuaƟons & low liquidity.
Placements & other equity capital markets iniƟaƟves should be considered where strong appeƟte from a party is expressed.
DiluƟon should be a secondary consideraƟon to Balance Sheet health and aƩracƟng new investment before it is needed
VIII. Activists, Short Sellers & Private Equity
Not all companies strug-Declining valuaƟons and illiquidity are ideal market condiƟons for Short
Seller Funds, AcƟvists and PIPE players (Public Investment By Private Equi-
gled during the GFC.ty). The majority of Board Members and CEOs of public companies have
not had experience in dealing with these market parƟcipants – and
turbulent markets can be a tough Ɵme for the first lesson The astute took the
PIPE players have the opportunity to take public companies private at
opportunity to position forheavily discounted valuaƟons to those in normal trading condiƟons
AcƟvists & short sellers can also take the shape of “wolf packs” and infor- tomorrow with
mally (not forming legal “associaƟons”) gang up on CEOs and Boards to
aƩempt to force change. Responding to such disruptors is Ɵme consuming, opportunistic M & A deals
expensive and distracƟng – reducing the Ɵme the CEO and Board have for
opƟmising efforts to manage and grow shareholder value. Board and CEO & well planned growth
paralysis are the ideal condiƟons for “disruptors” to flourish
initiativesIX. Mergers Of Necessity
With Mid and Small Cap companies the rapid decline in Market CapitalisaƟon can have a knock on effect of making the Corporate
costs to business size disproporƟonal, and the ability to raise meaningful capital remote. This includes things such as CEO and
Chairman pay – which both can become the focus of AcƟvists.
In this environment merger for necessity can be a raƟonal outcome, and for the CEO and Board flexibility in thinking on this area
can pay dividends. Being the iniƟator as opposed to the respondent to a Merger Proposal is preferenƟal
Any merger should, of course, result in a material shiŌ in the value proposiƟon of the 2 merger parƟcipants post transacƟon.
Ideally for Mid Market companies they should be focussed on achieving some form of Index weighƟng, or for smaller players
achieving a market cap / enterprise value with corresponding liquidity that emerging insƟtuƟonal funds will take interest
X. Higher Quality Dealmaking
Warren BuffeƩ is famous for his saying in his 2004 Berkshire Hathaway Chairman’s leƩer : “Investors should remember that ex-
citement and expenses are their enemies. And if they insist on trying to Ɵme their parƟcipaƟon in equiƟes, they should try to be
fearful when others are greedy and greedy only when others are fearful”.
Turbulent markets are a rich hunƟng ground for astute Bidders, and savvy management teams that see the opportunity of Public
to Private transacƟons. Paralysis should be replaced with that sense of opportunity to drive shareholder value with a compelling
transacƟon or transacƟons
Nicholas Assef—January 2016

5. 5
Key Take Away For CEOs & Boards of Directors
Volatile market conditions pass. For the astute CEO and Board the opportunity is to understand how to both maintain and max-
imise shareholder value in trying market conditions that are trying for all companies
Three key learnings from the GFC period that should be front of mind are :
1. Balance Sheet gearing can have a direct impact on the equity valuation of the Company. Equity value can be driven
down irrationally where it is perceived that there is either too much or poorly structured debt (including near term refinanc-
ing requirements)
2. Certain market participants flourish in these conditions. CEOs & Boards need to have specific strategic plans to deal with
Activists, Short Sellers and opportunistic Takeover Proposals— in particular where presented by Private Equity players
who are on the whole both patient and sophisticated
3. Opportunity knocks. Maintaining flexibility and being pro active pays dividends. The deal that may be a “company maker”
is likely within reach at a compelling valuation & attractive terms. Expansion with strategic alliances (both domestically
and cross border) should be considered and pursued. Be on the front foot. Plan how to grow stronger and execute those
plans
Hopefully these market conditions will settle in the coming months, but in the event they don’t then for the CEO and Board under-
standing both the challenges that will come and having decisive positive action plans to deal with those potential challenges is a
prudent and logical investment of time
Start today. Get a jump on your competitors that will likely assume the position of paralysis
For over 10 years Lincoln Crowne & Company has helped public companies, financial sponsors and government entities deal with
challenging strategic M & A transactions, corporate finance & strategic advisory initiatives
Across the GFC period LCC worked along side its client CEOs and Boards on tough problems & opportunistic decisions by providing
experienced, independent advice on:
 M & A initiatives comprising both domestic and cross border mergers, opportunistic acquisitions and divestments (including non
core assets - in whole or part)
 Dealing with negative events including slowing corporate performance, activist investors, contentious shareholder issues and
Joint Venture disputes
 The development of organic and inorganic growth strategies that would endure stormy market conditions and position the client
to deliver positive shareholder value
 Capital management optimisation strategies including building the case for such initiatives as on market buybacks, potential
equity raisings and debt refinancings
Nicholas Assef LLB (Hons) LLM MBA
ExecuƟve Director
Tel : + 61 2 9262 2121
E: naa@lcc.asia
W: www.lcc.asia
T: @NicholasAssef
Nicholas’ career has spanned the legal profession, academia and the corporate world for over 25 years
Formerly an attorney with Allen Allen & Hemsley’s corporate practice in Sydney, Australia his career evolved to investment banking after completion of his MBA at the
world ranked Simon Business School at the University of Rochester (New York). Whilst in the USA Nicholas also had the opportunity to undertake study at Harvard
Business School. In academia Nicholas has been on staff at both Macquarie University’s Applied Finance Centre and Bond University’s Law School. Nicholas
speaks regularly on topics including strategy, leadership, shareholder value and business performance
Nicholas works across the Australian and South East Asian markets, specializing in M & A, shareholder value driven initiatives, corporate performance and complex
commercial negotiations. He has also had extensive specific experience dealing with Activist investors (acting both for them, and against them)
Nicholas Assef—January 2016