Stop! Don’t Move

Though counter to human instinct, “do nothing” is often the most prudent course of action in the capital markets.
Craig Orchant and Reuben DanielsOctober 19, 2012

Most of us have heard the adage that “some of the best M&A transactions are those that aren’t pursued.” Perhaps less well known is that this old saying applies to capital-markets activities as well. Often the most prudent course of action in the capital markets is, in fact, to do nothing.

Unfortunately, an action plan based on inaction runs counter to instinct. The “no action” alternative typically receives scant attention from the bankers and service providers who are paid to take action. CFOs need a healthy skepticism, and we often advise companies to consider the “do nothing” strategy with the same enthusiasm of other alternatives.

In one instance, we worked with a company completing an acquisition, and its investment bankers encouraged the company to tender for the target’s debt. This is common practice to simplify the capital structure and relieve the acquirer of the target debt’s covenants. However, the problem for the company was that, in addition to advisory fees, the tender premium payable to investors was substantial.

Instead, we asked whether there were any debt covenants that would compromise the company’s business operations. We evaluated the documentation, prioritized those covenants in terms of restrictiveness, and suggested a series of modifications. With a few modest amendments and changes to the corporate structure, the company avoided an expensive tender premium and saved more than $100 million by leaving the target’s bonds outstanding.

Another client had placed a high-yield term-loan transaction that included a requirement to hedge interest-rate exposure. Prospective banks were encouraging the company to execute these hedging transactions; however, the company was resistant because it intended to refinance the loan or pay down the debt through asset sales. Creating fixed-rate exposure would actually have exposed the company to interest-rate changes.

Instead, we reviewed the loan documents and discovered a carve-out that allowed the company to request a waiver from the agent bank alone. Rather than negotiating an amendment with all the lenders, the company simply had to negotiate with its lead bank. It was successful in obtaining the exception at no cost, and in under an hour.

In another instance, we were engaged to advise on a public debt security offering. As the company assessed market conditions, the underwriters scheduled the obligatory morning update call to make a “go/no go” decision. The European market open had shown weakness and only limited new issue activity; although the issuance calendar had some transaction backlog, market indicators in the United States were also weak. The underwriters characterized market conditions fairly but wouldn’t commit to a recommendation, preferring to have the issuer insist on a “go” despite the poor open. 

The execution plan contemplated a “no go” decision if conditions were not ideal. We recommended that the company wait for more favorable conditions. As the day went on, only one other issuer announced a transaction and it became clear that our client’s decision to do nothing was the correct one. The company went to market the following week in a more stable and accommodating environment with great success.

The financial markets are replete with similar examples wherein doing nothing is the most prudent path. Of course, developing a “do nothing” scenario requires independent perspectives and, often, as much analysis and resources as any other potential strategy. The reward is that the next time you “stop and don’t move,” you may truly be taking the best course of action.

The authors are co-founders of EA Markets LLC, a corporate-finance and capital-markets investment bank based in New York.

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