Protagenic Therapeutics Inc. (PTIX)

[buckhunter102001]

EXCELLENT READ!!!

http://www.alixpartners.com/en/WhatWeThink/General/DistressedMASuccessItsAllaboutIntegration.aspx

Distressed M&A Success


It's All about Integration

By Heike Munro, Managing Director, AlixPartners and Dr. Stefan Ohl, Managing Director, AlixPartners

Every major acquisition forces management teams out of their comfort zone, but takeovers of distressed companies can test even the most experienced manager's expertise. Characterised by time-critical processes and a limited circle of potential buyers, these transactions benefit from an integrated approach that marries a heightened focus on due diligence, financing and structuring with a concentration on operational efficiency.

THE EXCEPTION IS BECOMING THE NORM

The number of distressed M&A deals has risen significantly in the last few years, which is not surprising given the crisis years of 2008 and 2009. And according to our forecasts, global M&A activity should increase significantly this year, especially in sectors that have enjoyed a strong economic recovery in recent months, including the automotive, mechanical engineering and chemicals industries. At the same time, we are also seeing growing M&A activity in secondary restructuring, which is permanently changing the capital and property structure in this market.

DUE DILIGENCE IS JUST THE BEGINNING

A successful restructuring requires careful preparation across a wide range of areas, from valuation and financing of acquisitions to the creation of an integration and business plan that anticipates and exploits potential synergies. Potential acquirers should conduct a comprehensive feasibility study of the restructuring process as well as a full investment evaluation that takes into account all the restructuring cost and external financing required. In this way, buyers of insolvent or crisis-ridden companies will be armed with the crucial information that can significantly impact the financing and structuring of the transaction.

INSOLVENCY ACQUISITION

For any potential buyer of an insolvent company, the first priority is to conduct a thorough evaluation of the risks involved in the transaction. The scope of the remaining liabilities for the insolvency administrator must also be assessed, as well as the lasting effects insolvency may have on the target company. Once assessed, these effects can be mitigated where possible and/or factored into the purchase price. It's important to note that the fallout from an insolvency is invariably hard to quantify accurately, and the fact that the insolvency administrator, in practice, may not give contractual guarantees in this area can make this pricing process extremely difficult for the buyer. Therefore, the best solution is often to negotiate a credit extension with the existing third party investors on a regular basis.

SOLUTIONS FIRST

The buyer's due diligence process should focus on a realistic provision for both short and long-term liquidity requirements. Important insights can also be gained through a detailed analysis of the causes leading to the company's past problems. This analysis should include an accurate description of past and present market trends, comprehensive research into the underlying causes of weakened competitiveness, and an examination of any shortfalls in internal leadership or management process. The due diligence process should also, of course, cover standard purchase risks such as "Material Adverse Change" (MAC) and "Change of Control" (COC) clauses.



THE ROLE OF THE BANKS

In any transaction, buyers should be well-informed about their key negotiating partners. In distressed transactions, these partners are more likely to be banks than shareholders. When a company's value barely covers its bank liabilities, banks decide on the viability and financing of the transaction. This means that the size of the offer is not necessarily the only criterion determining the purchase price. The purchase price structure will need to be flexible enough to accommodate earn-outs and other elements of value, such as debtor warrants and Profit Participating Loans (PPLs), for the buyer's purchaseprice expectations to be compatible with the creditors' value adjustment issues. While the preservation of jobs and premises are important factors for those selling an insolvent company, greater priority is typically given to the prospects for the organisation's future commercial success. This is largely because many such transactions are financed by existing lenders. These lenders expect a robust business plan, a workable strategy, and an independent assessment of the chances of its successful implementation.

INTEGRATION AND RESTRUCTURING "FROM A SINGLE SOURCE"

Once the purchase has been completed and the "first 100 days" period has begun, the focus turns to stabilising and restructuring the newly acquired company. At this stage, large company divisions that require restructuring should be compartmentalised until all essential restructuring measures have been completed. If management capacity allows it, business units unaffected by the restructuring activity can be merged concurrently with this process. It is crucial that managers avoid the temptation to conduct a comprehensive integration exercise before they have solved urgent problems. Failure to do so risks spreading hidden problems – or, worse, "infecting" operationally healthy processes and business units. The integration process for distressed mergers is different from the integration process for "healthy" ones. Distressed mergers are not "mergers among equals" but rather transactions driven by the buyer. The acquiring company will make integration decisions and will likely fill key posts with its own managers.However, buyers must remember that the future effectiveness of the organisation is the ultimate goal and should make efforts to identify, inform, and incentivise qualified candidates from the target company as well.

THE BENEFIT OF EXPERIENCE

In the post-merger integration of distressed companies, cash and financing issues as well as operational concerns are critically important. Often, management teams realise they lack the necessary expertise or time to focus on restructuring efforts while also running the day-to-day operations of the company, and so they recruit specialists to form an experienced, interdisciplinary task force led by a chief restructuring officer (CRO) or a chief integration officer (CIO) in the restructuring phase. These individuals can make the appropriate decisions quickly to stabilise battered divisions and provide stakeholders with the confidence and security they need.

ADVICE FOR SUCCESSFUL PRE-MERGER AND POST-MERGER INTEGRATION

Keep daily business running smoothly Key customers and collaborators must be specifically targeted amid the process - otherwise problems will arise.

Work begins with the "signing" Transactions are at their most sensitive during the period between "signing" and "closing". This is the time to prepare for integration.
"Follow the money" The entire integration process must focus on the strategic rationale and the financial value levers of the transaction. (Most transactions fail not because of a bad purchase decision, but because of poor execution.
Make and implement decisions quickly The new organisational structure for the top three levels should be established by Day One in order to avoid unrest in the organisation.
No compromises in staff appointments Management and staff should be selected according to their capabilities and their relationships within the company; in cases of doubt the latter can be even more important.
Sustainable change through business content Change management should be a key part of the daily work of integration rather than a separate process.
Focus on the future Rather than explaining the differences between the new and old organisations, focus on the creation of a new, joint reality.

Lead - don't delegate Senior management should lead by example and demonstrate authenticity by living up to the core values they promote.
Communicate, Communicate, Communicate
You can never communicate enough - however, the core messages must always be credible and free of contradictions.


LESSONS LEARNED

Before the takeover, the target company's short and medium-term liquidity requirements must be defined. For distressed companies, these requirements are often higher than anticipated.
Decisions must be made quickly and pragmatically with a sharp focus on the relevant levers. Problems must be detected and dealt with quickly. Rapidly defining and implementing effective solutions are more important than conducting an overly detailed analysis of the root cause. "Blame culture" must be eliminated.
Management teams should be reoriented and – if necessary – quickly changed.
During the integration phase, any changes made should be closely linked to daily business activities rather than treated as a separate "project".
The company management team must demonstrate strong leadership. Only if the top tier leads by example can the necessary changes be introduced into the entire organisation via middle management.
Finally, there are no "cookie-cutter" solutions for distressed PMIs. The ultimate key to success is the rapid deployment of solutions focused on specific situations, as well as the courage to act decisively when crunch-time comes around.


BTW, I wonder WHO appointed Mr. Giordano as CRO???

Possibly these guys?

http://www.apcl.com/apcl-content.php?article=Content/CMT&pageid=47&parent=21