The scene at the midtown Manhattan law firm last fall was reminiscent of the World Series of Poker. In fact, though, the setting was Mike Bond's first deal negotiation since joining Avaya Inc. a few months earlier as its vice president of corporate development.
Communications systems provider Avaya, which Bond represented, was one of four bidders involved in the afternoon auction. On offer in a Chapter 11 asset sale was Expanets, a telecom-gear sales and service unit of the bankrupt utility NorthWestern Corp.
Bond and his competitors were instructed to raise their bids in $1 million increments. Each could pass on one round only; skipping a second round meant dropping out of the process. At the end of the day, it was Bond who managed to hang in there, and Avaya walked away with Expanets - with which it had once worked when both were part of Lucent Technologies Inc. - for $152 million. "Certain people were under stress," Bond says. "You could tell that certain people were not going to make it."
Such auctions have become common in recent years, as bankruptcies have proliferated and have increasingly ended up in liquidations and asset sales rather than rehabilitation. As a result, more and more strategic buyers such as Avaya have shown up to bid against private equity firms and other financial buyers that have traditionally dominated the proceedings. The competition can be tough. In the Expanets auction, Bond's rivals included Cerberus Capital Management LP and other savvy buyers of distressed assets.
Strategic buyers haven't always won. H.J. Heinz Co., for example, wanted the pickle and barbeque sauce units of bankrupt Vlasic Foods International Inc. in 2001. But Hicks, Muse, Tate & Furst Inc. won the auction with a $370 million offer for the entire North American operations of Vlasic.
Increasingly, though, corporate dealmakers feel they have to get into the game.
"For a long time, CFOs shied away from these deals because they didn't understand the asset or there was too much downside risk being associated with a company that often required significant management muscle to straighten out," explains Richard Nejame, a managing director in the restructuring shop at investment bank Lazard. Lately, though, some of the best opportunities for strategic acquisitions involve distressed targets.
Bond, 46, has experience buying both distressed and solvent companies. His résumé includes a stretch in the early 1990s with a textiles maker that a merchant bank acquired out of bankruptcy. He also worked briefly at AT&T Corp. before moving to Lucent's corporate development team after that company's spinoff from the telephony giant in 1996. After following with three years in the technology and telecom group at J.P. Morgan Chase & Co, he moved to Avaya in August.
So what are the big differences between the two kinds of transactions? "Bankruptcy courts are always looking at the pure value of the company," Bond says. In that sense, buying a distressed asset can be simpler than buying a solvent company, and having to think about how to handle the management team and the melding of two organizations.
Probably the most fundamental difference is this: You're not dealing with one counterparty, but (via the bankruptcy estate) with many.
"The estate encompasses a whole new set of claimants," says Larry Young, a principal with Southfield, Mich.-based turnaround management firm AlixPartners. Creditors these days are largely distressed-debt investors looking for a certain return on their investments after acquiring bonds in these companies at pennies on the dollar.
In the Expanets sale, as in most bankruptcy auctions, the practice was to get all bidders to agree to a common set of terms before the actual bidding starts. According to Bond, the morning became essentially four separate deal negotiations, with each party trying to push certain terms of the deal in its favor - paving the way for it to bid more aggressively later in the day.
"There was far more jockeying and negotiating" during the terms-negotiation phase, Bond says.
Besides Cerberus - an aggressive investor that had already joined TenX Capital Management, its current partner, to buy a Montreal telecom firm out of bankruptcy - Bond was up against Tom Gores' Platinum Equity LLC and his brother Alec's Gores Technology Group.
The bankruptcy auction itself usually unolds in a two-step process. The debtor first picks a stalking-horse bidder, which sets the initial benchmark as to how much the asset is worth. The second stage of the process is the actual auction, which occurs after all the bids have been submitted.
In this case, the Cerberus-TenX group served as the stalking horse, with a bid of $107.5 million. Initial competing bids had to be $5 million higher. The stalking horse group would net up to $4.25 million in fees and expenses if it lost the auction. Auctions also often require that the rival bidders put money in escrow or make a deposit before entering. This is not necessarily a rapid process. Some auctions have been known to drag on for days on end.
Avaya hired J.P. Morgan to advise on the auction. Bond only has five people on his team, and felt he "needed to have a second pair of eyes." Sidley Austin Brown & Wood LLP served as Avaya's counsel.
But even after the auction, Avaya wasn't finished making deals. The company wanted Expanets because it was an important distributor of its products, purchasing and reselling its communications systems. Expanets did the same for other companies, though - including Siemens AG and Cisco Systems Inc. Avaya is now divesting those non-Avaya business units. It is also integrating 800 former Expanets employees.
The Expanets deal was Avaya's second purchase of a distressed asset, it acquired bankrupt Quintus Corp. for $48 million in 2001. Will there be any more? Bond notes that a recovering telecommunications industry means there are fewer attractive distressed assets out there. Still, it's a nice skill set.
"If we had to, we would," Bond says. -Jonathan Berke
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