Losing Lehman

Companies that had relied on Lehman Brothers for help with M&A have learned the value of contingency planning.
John ZhuNovember 3, 2008

Misys, a UK-based business software provider, thought it had sealed a deal to buy American rival Allscripts Healthcare Solutions this summer. The buyer’s lead adviser committed in March to a $305m (€233m) term and revolving credit facility that would finance almost all of the $330m bid.

But its adviser was investment bank Lehman Brothers, which filed for bankruptcy protection in September. All bets seemed to be off. Allscripts postponed its AGM and Misys’s share price fell more than 10% after the news. As the banking landscape is remade, with former stalwarts such as Lehman and Bear Stearns dropping out of the picture, many CFOs, including Jim Malone at Misys, are learning important lessons about contingency planning.

Fortunately, Misys secured $325m in late September, only two days before it was due to pay Allscripts’ shareholders. The package consisted of two revolving credit facilities, the first from Bank of Ireland, HSBC and Royal Bank of Scotland, for a total of $150m. The rest came from Misys’s largest shareholder, ValueAct Capital, a private equity group.

Another Lehman client left in the lurch was Staples, a US stationery group, which bought Dutch rival Corporate Express in June for €3 billion. Lehman Brothers was an adviser and also provided a $3 billion bridge loan to support the bid, which was announced in February. “It was an unsolicited offer, which made it even more important that we had financing in place before going public with the bid,” explains John Mahoney, CFO of Staples.

Thinking ahead, Mahoney sought to diversify his risk. “When concerned about the strength of your partners, you have to get others involved,” he says. As soon as the bid was announced, Staples syndicated the financing, sharing it between Lehman, Bank of America and HSBC. “The CFO must make sure that problems with its partners do not get in the way of executing corporate strategy,” asserts Mahoney. After all, when Staples sealed its deal with Lehman, Bear Stearns had just collapsed, “so we didn’t exactly have our eyes shut to the potential impact it would have on Lehman Brothers,” he says.

When Barclays bought Lehman’s American operations, the British bank took on its obligations with Staples on the same terms. In return, Staples resisted the temptation to draw down lines of credit pre-emptively. The company usually generates strong cash flow in the second half of the year, helping it roll over commercial paper (CP) commitments, the CFO says. But with central banks around the world pumping money into moribund CP markets, even this formerly reliable source of financing can no longer be taken for granted.

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