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— Dealmakers —
For David Solomon and Michael McFadden, the August 2007 sale of their firm, Goldsmith Agio Helms & Lynner LLC, to Lazard could not have been better timed. The firm's greatest strength, its expertise in M&A, was also its greatest liability. While Goldsmith was confident in the M&A advice it offered clients, Solomon and McFadden knew they had little else to offer. This was perfectly fine in the boom years, but then the boom went bust. Clients now have different needs, particularly restructuring expertise. "Two years ago, we were all about middle-market M&A," says Solomon. "Now we can walk into a client and say, 'We can find the right solution for you' -- not just M&A, but advising on raising public and private capital as well as restructuring."
One example: Lazard Middle Market advised Heartland Automotive Holdings Inc. as it emerged from bankruptcy earlier this year with majority shareholder Quad-C Management Inc.'s holdings intact. The buyout firm pumped $28 million into Heartland in exit funding. Solomon, who hails from the Midwest, joined Goldsmith in 1991 in Minneapolis, which at the time was its sole office; he was employee No. 6. He says the firm's collegiality is partly what kept him there. "We started off as a Midwestern firm not steeped in the New York milieu. There's a very close-knit group of people." McFadden, previously at Cravath, Swaine & Moore LLP in New York, joined the firm, which by then had a staff of 12, in 1993. In 1999, Solomon moved to New York and set up Goldmsith's first satellite office. The pair became co-CEOs in January 2007. By the time Goldsmith merged with Lazard, it had around 100 staff in four offices. McFadden praises Lazard's high professional standards and says it's a fun place to work. It has also made him a better banker, he says. Two big reasons: Lazard's global presence and breadth of relationships. To illustrate his point, McFadden mentions the recent sale of Lazard Middle Market client Kurtzman Carson Consultants LLC to Australia's Computershare Ltd. "We received significant help and counsel from [Lazard's] Australian office, which had a relationship with Computershare," says McFadden. Computershare on March 16 agreed to pay at least $97 million and as much as $135 million (depending on earnings growth targets) for the El Segundo, Calif., bankruptcy consultant. The Lazard takeover has also introduced Solomon and McFadden to clients who had little to do with the middle market. Case in point: Dow Chemical Co., which with Lazard Middle Market's help sold parts of its automotive sealer and adoptive business to Katzberg Invest AG of Switzerland in February. The pair say they now have momentum and the firm is inundated with resumés. "We're taking this opportunity to build the industry groups we want for the future," says McFadden. "We're targeting rock star bankers because at the end of the day, you need the best people to be the best firm." Since last summer, LMM has added six managing directors, to bring its total to 23 (a 40% increase). It has added bodies to its healthcare services and consumer practices and continues to build out its restructuring business -- something McFadden and Solomon expect will remain in high demand. "This cycle is more severe than the early '90s and 2001-'03," says McFadden. "The markets have changed so much," particularly from a private equity viewpoint. "In the early '90s, there was $13 billion of private equity in North America in total. Today you have $13 billion funds." Adds Solomon: "Private equity has also gone through multiple cycles as it has matured. It really started to grow in the late '80s. Its first big cycle came in the early '90s. When the tech bubble burst in '01, the reaction to distress was, 'We're going to hold on tight and hope it comes back.' There was limited use of outside restructuring expertise. This cycle is different and PE is smarter. It's moving to forestall the worst case, to preserve equity value. You can do that if you take action early. "We'll come out of it, but we're not at the peak," he adds, noting that corporate high-yield bonds are probably at a default rate of 7.5% or 8%, which, according to Edward Altman at New York University, may reach 12% to 13% by year's end. Hold on. |
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