Status quo at the abyss?

• Author: Owsley, Henry F.
• Position: CRISIS MANAGEMENT

Faced with some combination of impending liquidity and capital-structure crises, companies and their boards of directors may consider multiple options. One option is to maintain the status quo and do nothing.

This is roughly analogous to the physician's credo of "first, do no harm." In effect, this strategy plays for time (liquidity permitting), in the hope that market forces or operational initiatives can adequately address the capital structure challenges that have arisen because of the mismatch between leverage and operational performance.

In this scenario, the company will monitor the situation, perhaps trying to improve liquidity internally but without seeking new financing. It may not hire restructuring professionals (in our view, a mistake) and is not likely at this juncture to develop, much less implement, a financial restructuring plan.

Maintaining the status quo must always be considered in conjunction with other potential courses of action, in part because the company and its various constituencies will have different perspectives on the rewards and the risks of the status quo approach.

Management teams and boards of directors are never eager to admit to problems and never excited about the prospect of interviewing, engaging, and paying high-priced investment banking and legal talent specializing in distressed company problem-solving. Moreover, because capital structure and liquidity issues are almost invariably linked directly to operational challenges, management must spend all its time on operations--leaving precious little time, and likely having little inclination, to focus on capital structure issues.

Thus, to these parties, the advantages of maintaining the status quo are:

* Management's time can be spent solely on operations, and not on the development, negotiation, and implementation of a financial restructuring.

* The company can avoid the expense of hiring restructuring professionals.

* If the company's operations do turn around in a dramatic fashion, this alternative (which involves no dilution) can result in the best outcome for old equity.

Here are some of the disadvantages of the status quo approach:

* Sticking with the status quo too long may preclude a later sale process, or it may delay a sale beyond the point of peak value. "The sooner the safer," heavyweight champion Jack Dempsey once said when asked why he sought to knock out his opponents as quickly as possible. The sooner a company begins to address these...