Come strong or don’t come at all in the middle,” Tony Alvarez II relies on basketball analogy to cut to the chase while explaining the basic factors essential to turn around a sick corporation. Bad news usually makes Alvarez smile.
For over three decades he and his partner Bryan Marsal has been corporate America’s favourite Mr Fix Its — ‘doctors’ who cure distress by radically transforming companies to salvage value.
But life has especially been frantic for the duo and their eponymous New York headquartered consulting firm in the last decade when they have dominated most of the high profile insolvency and restructuring cases.
From the complex and expansive Lehman Brothers bankruptcy mandate to Washington Mutual and Arthur Andersen; from Timex Watches to Calvin Klein jeans — Alvarez & Marsal has been relentlessly chopping costs, hoarding cash and helping marquee names to turn the corner. “The key to our model is not cut, cut and cut.
It’s about prioritising your people, product and figuring out what is core and accordingly spend,” explains Alvarez, co-CEO and MD, Alvarez & Marsal (A&M), during his exclusive interaction with ET, insisting that he is not a mercenary, who only takes away jobs. In Mumbai on a whistle stop tour to survey the firm’s 4-year old local operations, Alvarez shares his blueprint.
India is a very different market for a firm like A&M to replicate its global success. Creditors here are not activists who would throw out incumbent managers or promoters and liquidate the assets to recover dues.
Loans get rolled over or restructured on mutually agreed and convenient terms under the corporate debt restructuring (CDR) mechanism. Any advisory work is also is provided by the merchant banking arms of the lenders. How then can A&M’s army of consultants, functional experts or operating managers cut their teeth with India Inc? How will their brashness convince local lenders to rope them in to resuscitate some of the stressed assets in their bank portfolios? Alvarez seems nonplussed even though he accepts that conservations with local lenders have so far been “mostly passive and slow.” But the idea of entering a market that is not used “to a product like us is not new,” he says.
“Resistance is natural. The local community (read banks, promoters, investors) will be hesitant but we have to be patient. We have faced similar challenges in Brazil, Russia and China. Even Europe didn’t know us either before 2001,” he adds hoping that eventually people will acknowledge “that they are a force for good.”
Till then, A&M’s 11-member India outpost has been opportunistic and have zeroed in on private equity firms to improve the operating efficiencies of their portfolio companies. Some are stressed, some even distress while many need tweaking around specific pressure points.
“The role that we play today is helping companies improve operating performance, liquidity, working capital,” highlights Alvarez. “We’re working the asset as opposed to just the financials.” Being consultants, A&M lacks the balance sheet muscle of an asset reconstruction company (ARC) to buyout the stressed assets themselves. They also can’t use their skills to quicken a bankruptcy proceedings because the law simply doesn’t exist here.
So fishing for opportunities with the PE firms stuck with bad investments makes imminent business sense. With dismal returns on investments, lack of exit options and even financial frauds in portfolio companies, the private equity community has been pushed to a corner.
And unlike banks, they are an impatient lot. Alvarez does not mince his words. “PE funds in India and China are facing a unique challenge. They thought this was an easy way to make money and exits came easy in a vibrant IPO market.
But the dynamics have now changed and the market has dried up. So they will have to hold on to their portfolio longer and are going to need managers to deliver operating performances,” he says. But it is not so simple.
Most funds have minority positions and limited management rights, so they really lack in flexibility or have a voice in most strategic decisions. “But even within that construct, there are trustworthy relations between the promoters are the funds,” feels Alvarez.
“The two interests should align if both are looking to grow the pie. I only see apotential clash in the timing of exit.” A&M would not divulge specific client details, only mentioning that they have so far worked on 20 projects in India. This is a clear indication that they are on the right track, believes the firm’s brass.
According to PE industry grapevine, the firm worked with WL Ross for seven months in 2010-11 to turn around the ailing textile company OCM — advising them on operational issues like cash-flow management, cost rationalisation and improving manufacturing efficiencies.
WL Ross, too, did not want to comment on the issue. They also worked on similar lines with a high growth seeking local mobile hand set maker, again a PE portfolio company.
With the heightened volatility, business should be booming for this consulting hot shop that is already clocking close to a billion dollars in worldwide revenues. But the client testimonials are mixed.
“In case of operating inefficiencies, we ideally work with the management to tap in-house talent or use people from our team that have seen many businesses scale up,” said Rahul Bhasin, managing partner, Barings Private Equity Partners India, not entirely convinced about the scope for advisors like A&M in India.
“More than advisors, what companies undergoing stress need is a special situations fund or an ARC that can help restructure business and solve liquidity issues,” quips Birendra Kumar, MD & CEO of International Asset Reconstruction Company.
“While working with us, they more or less delivered on their mandate. But for India, I find them seriously overpriced,” points out a former client. “They are not as differentiated as they are in the US, says a global PE fund manager currently raising money for an India specific distress fund.
Even firms like Mckinsey and Accenture are increasingly focussing on operational consulting in India.”
Some, however, do vouch for their credentials. “They do not create strategic blueprints like most consultants but will actually execute their strategy themselves. They are functional experts,” says India head of one of one of the largest bulge-bracket PE funds.
Source – Economictimes.com