Three Elements For Foreign Investors

Effectively Compete For U.S. Bankruptcy Acquisitions

Leonard P. Goldberger, Esquire[1]
Stevens & Lee, P.C.
www.stevenslee.com

Introduction

This is the third of three articles that deal with acquisitions of financially-distressed U.S. businesses and assets by foreign investors. The first article discussed the strategic bases for why making acquisitions out of U.S. bankruptcy cases makes good sense for foreign investors. The second described how this can be effectively accomplished, and provided three recent examples of successful acquisitions of complex businesses out of U.S. bankruptcy cases by Chinese investors. In that regard, foreign investors face a special set of challenges that make it more difficult to compete, i.e., language barriers, differences in business cultures, domestic (U.S.) political considerations, institutional insensitivities, and old-fashioned xenophobia. This article (which itself is divided into two parts) identifies three elements that are necessary for foreign investors to effectively compete in the U.S. distressed investment marketplace where the playing field is not exactly level.

The Three Elements

There are three basic elements that foreign investors must utilize in order to successfully compete in the U.S. marketplace for distressed investments: Information; Education and Connections. None of this should come as any surprise; however, it is sometimes necessary to focus on the fundamentals.

1. Information 
Information is the mother’s milk of investment. Beyond information about any particular investment target (which can be obtained through, among other things, effective due diligence), information about the distressed marketplace itself is essential for any successful participant. In the first instance, a foreign investor must have access to information about the deal flow of distressed investments. In this marketplace, access to a regular stream of information about new distressed business and investment opportunities -- either in the early stages of distress, during the slide into bankruptcy, or as they become new bankruptcy filings -- is essential for participation. This can be accomplished in any number of ways, from relationships with U.S. insolvency practitioners (see no. 3, below) to access to commercial services (like Inforuptcy) that provides useful data on businesses and assets along the continuum of distress. In this age of instant information, of course news of financial distress or new bankruptcy filings is immediately available from various sources that are either industry-specific or just general business news. The point is that if a foreign investor passively waits -- as opposed to pro-actively seeks information -- he or she is likely to remain on the sidelines. This is especially so because many U.S. sellers (and their agents) do not even consider marketing to foreign investors.

Once an investment target is selected, the foreign investor must pay close attention to any new developments, which will often occur more rapidly than anticipated. By maintaining communication with deal sources, or simply following developments in a bankruptcy case, foreign investors can stay apprised of significant events, like the filing of sale procedure motions, bidding schedules and deadlines, or objection deadlines in order to meaningfully participate in the acquisition process.

2. Education
Foreign investors must educate themselves (along with their professional advisors, and governmental officials who may be required to oversee approvals of cross-border investment transactions) about the nature and process of acquiring financially-distressed assets. Without at least a basic understanding of the U.S. bankruptcy process (both before and after the actual filing of a bankruptcy case, they are more likely to make costly (and, sometimes, embarrassing) mistakes, as well as having business expectations disappointed. Not only is an informed understanding of the process necessary for avoiding problems moving forward in the pursuit of an acquisition or investment, but it will also provide a basis for making important judgments about whether or not to proceed at all in any given situation.

The education process often involves three basic aspects:

• Understanding how distressed investment opportunities arise, and what is required to successfully exploit such opportunities;

• Understanding the U.S. bankruptcy process, in general, and the strategies and procedures for acquiring assets out of U.S. bankruptcy cases, in particular; and

• Understanding which strategies are compatible with a foreign investor’s local business culture.

The education process can also be furthered by observing the notable successes -- and failures -- of other foreign investors in U.S. bankruptcy cases. Moreover, educational information about investing in the U.S. is often readily accessible from public sources. Government agencies that encourage cross-border investment can be an important source of useful educational information. In China, for example, local ministries of commerce and other provincial- and municipal-level governmental agencies provide educational programs for Chinese investors seeking to make cross-border investments or acquisitions. Reciprocally, in the U.S., governments at the federal, state and local levels also provide outreach, incentives and educational programs in foreign countries in order to encourage just such investment activities.

3. Connections
The final element involves connections, both in the foreign investor’s own country, as well as in the U.S. Making the right connections can often mean the difference between success and failure.

In the foreign country (especially in countries like China where government plays such a pervasive role in all aspects of commerce), connections to appropriate governmental agencies and officials are crucial to obtaining the necessary support for any outbound investment project. This involves not only assistance with the various approvals necessary for the project itself, but also with such ministerial aspects like the ability to timely move cash offshore in order to make time-sensitive deposits in the bankruptcy sale process and, ultimately, to consummate the transaction.

On the U.S. side, the right connections are often a bit less formal, but no less important. Having connections to intermediaries who are familiar with the U.S. distressed marketplace and the. bankruptcy process is a threshold requirement. Without a knowledgeable U.S. intermediary, it can be difficult for foreign investors to take advantage of any type of deal flow. Such intermediaries can be investment bankers, business brokers, insolvency accountants, turnaround managers, etc.; indeed, anyone who keeps a finger on the pulse of industries that are experiencing in some form of financial distress, as well as cases for individual businesses that are being filed in U.S. bankruptcy courts.

Perhaps the most important connection is an experienced and knowledgeable U.S. bankruptcy lawyer. Experienced bankruptcy counsel can provide invaluable guidance in navigating the often-arcane U.S. bankruptcy acquisition process. Not only for the legal advice that must necessarily be provided, but bankruptcy counsel can also assist with the strategic judgments necessary to gauge the opportunities and pitfalls of any particular transaction. (As discussed in the second article, those strategic judgments sometimes require sophisticated combinations of financial, political and public relations factors.) Moreover, experienced bankruptcy counsel is likely to have his or her own sets of connections into the insolvency community, thus further providing the foreign investor with additional sources to generate new deal flow and other possible investment opportunities. Working with experienced bankruptcy counsel (or other insolvency-related intermediaries) can reinforce the informational and educational elements of the process, help the foreign investor to be more selective in evaluating potential investment opportunities, and create opportunities for earlier access to financially-distressed situations.

The Circle of Effectiveness

The foregoing elements are represented graphically as follows:

[1]Leonard P. Goldberger, Esquire is a cross-border insolvency lawyer, and works with Chinese investors in acquiring financially-distressed businesses and assets out of U.S. bankruptcy cases. He has written and lectured on this topic in the U.S. and China. The opinions expressed herein are solely those of the author and do not represent those of either his law firm or its clients.

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