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To: VA Advogado
I work for a large international financial institution, and most of my business consists of financing "distressed assets" -- i.e. securities and bank debt of bankrupt (or about to be bankrupt) companies -- for private investment funds which take active or controlling positions in these companies. As a result, I'm pretty familiar with the array of options available to companies structuring mergers and acquisitions in troubled situations. Also have been reading the financial press regularly for the past 10 years or so.

Basically, it's just a matter of garden variety capitalism: anything that anyone anywhere wants to buy, somebody somewhere is willing to produce and sell to them at some price. Only catch is, the deal has to result in a reasonable probability of improving the financial position of both parties, or it just won't happen. If Company A wants to buy struggling Company B, and struggling Company B needs and wants a buyer, then Company A, along with the public and/or private financial markets which will provide the financing for the acquisition, starts dictating the terms on which it would be willing to buy Company B. If there is reason to believe that there may be some significant liability problems popping up down the road from Company B's past activities (not necessarily illegal), then some sort of control over that potential liability will have to be part of the deal. A customized insurance policy is one way of accomplishing this. The insurance companies who underwrite policies like this are reinsured by reinsurance companies, and so are quite able to take a big hit now and then. But in the case of AA, the situation is so bad already, has such a high risk of getting much worse, and there is so little difference to a buyer between the value of the firm as a going concern and its readily available parts (clients and employees), that there's no way to structure a viable policy.

Like any insurance policy, this sort wouldn't be open-ended -- it would insure up to a certain amount. But if AA as a going concern is thought to be worth say $500 million, without the liability consideration, and the buyer and the financial markets determine that they would need liability insurance for at least $5 billion, and the insurance company is willing to provide such insurance at a rate of $125 million for each $1 billion of coverage, then the math goes underwater -- no deal. On the other hand, if the target company was worth $500 million liability free, the buyer determined the need for liability insurance for up to $3 billion, and an insurer was willing to provide a policy for $150 million per billion . . . voila! The math works, the buyer will offer to pay $50 million for the target company, and will pay another $450 million for the necessary insurance -- $500 million value purchased for $500 million. Theoretically, the acquirer gets bigger and more profitable, the insurer comes out ahead (though not by anywhere near $450 million, since they have to factor in expected loss and reinsurance premium), and the target company's going concern value is preserved -- everybody wins! Ain't capitalism nifty?

126 posted on 03/13/2002 7:02:19 PM PST by GovernmentShrinker
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To: GovernmentShrinker
Ain't capitalism nifty?

ain't the collective wisdon of fr nifty?

in fact, it is guttenburg writ large.

139 posted on 03/14/2002 2:21:14 AM PST by johnboy
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