Newsletter – September 2010

The implication of the credit crisis on the relations between companies and investors

After a period during which banks were not mutually lending and where credit terms had so tightened that even the rashest investors seemed to have capitulated, we can say that the current credit market is doing rather well. If, from this perspective, the 2008 – 2009 credit crunch has eased, the fact remains that mentalities seem to have been durably affected.

Under our latitudes, intensification of the “Old Europe” spirit has particularly notorious effects on the sector of direct acquisitions. Indeed, the tightening attitude of credit institutions is accompanied by a similar reticence on the part of shareholders. Without going into cultural ways and entrepreneurial spirit, this reticence is indicative of the degree to which investment decisions stand on fragile ground, independent of company management determinations.

It is precisely when there is a lack of liquid assets that companies are the most dependants upon their shareholders and that impending decisions require thorough analysis. For a company in development phase or adapting to globalization, a financing gap will most often bring devastating consequences. It is therefore indispensable for an acquisition of holdings to define a long-term vision, not only the systematic strategic angle but also covering the financial dimension.

This being said and to avoid ending up in an impasse, the implementation of adequate control mechanisms and monitoring will, to a large extent, allow for proper anticipation of potentially dangerous evolution for a company’s liquid assets. Of course the recent world economic crisis is one of those events that defy integration to a plan. In this case, the hardening of the banks’ attitude toward lending has forced numerous companies to turn to their shareholders.

In this context the tendency of the shareholders, also affected by the global crisis, is unfortunately to adopt a conservative attitude. Assuming that the shareholders have the additional funds available for the company in difficulty, the key question becomes: are the negative financial consequences potentially greater if funds are granted or not granted?

To make an informed decision it would be necessary to have in depth understanding of the situation, specifically the state of the company’s development and the way it generates value. It is this knowledge which would allow for the necessary reflection on the subject of granting, or not, the funds.

In the case of refusal to finance, it would be advisable for the shareholders to elaborate scenarios with the management – who would tend to be alarmist – checking for fall-back solutions to preserve the company. On the other hand, if the shareholders intend to grant the financing, it would be in everyone’s best interest to factually ascertain what the company can accomplish with the additional funds.

This type of analysis will generally bring out the best option. If this is not the case, the psychological mind-set of the shareholders will be the determining factor; those who tend to be entrepreneurial will grant the funds and those who want or need to preserve their holdings will refuse.

The implication of the credit crisis on the relations between companies and investors

After a period during which banks were not mutually lending and where credit terms had so tightened that even the rashest investors seemed to have capitulated, we can say that the current credit market is doing rather well. If, from this perspective, the 2008 – 2009 credit crunch has eased, the fact remains that mentalities seem to have been durably affected.

Under our latitudes, intensification of the “Old Europe” spirit has particularly notorious effects on the sector of direct acquisitions. Indeed, the tightening attitude of credit institutions is accompanied by a similar reticence on the part of shareholders. Without going into cultural ways and entrepreneurial spirit, this reticence is indicative of the degree to which investment decisions stand on fragile ground, independent of company management determinations.

It is precisely when there is a lack of liquid assets that companies are the most dependants upon their shareholders and that impending decisions require thorough analysis. For a company in development phase or adapting to globalization, a financing gap will most often bring devastating consequences. It is therefore indispensable for an acquisition of holdings to define a long-term vision, not only the systematic strategic angle but also covering the financial dimension.

This being said and to avoid ending up in an impasse, the implementation of adequate control mechanisms and monitoring will, to a large extent, allow for proper anticipation of potentially dangerous evolution for a company’s liquid assets. Of course the recent world economic crisis is one of those events that defy integration to a plan. In this case, the hardening of the banks’ attitude toward lending has forced numerous companies to turn to their shareholders.

In this context the tendency of the shareholders, also affected by the global crisis, is unfortunately to adopt a conservative attitude. Assuming that the shareholders have the additional funds available for the company in difficulty, the key question becomes: are the negative financial consequences potentially greater if funds are granted or not granted?

To make an informed decision it would be necessary to have in depth understanding of the situation, specifically the state of the company’s development and the way it generates value. It is this knowledge which would allow for the necessary reflection on the subject of granting, or not, the funds.

In the case of refusal to finance, it would be advisable for the shareholders to elaborate scenarios with the management – who would tend to be alarmist – checking for fall-back solutions to preserve the company. On the other hand, if the shareholders intend to grant the financing, it would be in everyone’s best interest to factually ascertain what the company can accomplish with the additional funds.

This type of analysis will generally bring out the best option. If this is not the case, the psychological mind-set of the shareholders will be the determining factor; those who tend to be entrepreneurial will grant the funds and those who want or need to preserve their holdings will refuse.