An upward trend in engagements, staff size, and firm acquisition and consolidation activity in the past 12 months suggest the turnaround industry is retooling for the next surge in restructuring TMA members believe is coming by the end of 2007.
Respondents to the Turnaround Management Association’s 2006 Trend Watch Poll on the state of the turnaround industry released recently included more than 200 companies that specialize in turnaround, financial advisory and consulting services. Forty-seven percent report an increase in engagements in the past 12 months, 29 percent saw a slight decrease and 24 percent said there had been little to no change. This shows an uptick in business from the 2005 poll, in which 5 percent fewer (42 percent) saw an increase in business.
The revenue outlook was even more optimistic. In the poll, 54 percent expected their companies to earn more in 2006, which compares favorably to the 2005 poll, in which just 48 percent expected increased revenues that year. Those who expect revenues to remain flat (29 percent) or to actually decrease during 2006 (26 percent) also point to a slightly improved outlook over last year’s results.
A spike in those from private equity firms and hedge funds inquiring about turnaround services points to a major change for the industry, with 35 percent of respondents naming them as sources, as opposed to 13 percent last year. This is exceeded only by the traditional sources of banks/lenders and attorneys, with each obtaining 57 percent response rates.
"This increase in activity is reflective of two trends in our industry," said Colin Cross, President of the Turnaround Management Association and Managing Director of Crystal Capital in Chicago. "First, private equity firms and hedge funds are controlling an increasing number of middle market companies. Second, they are recognizing the benefits associated with retaining experienced TMA professionals to support them in due diligence, operational improvements and strategic planning."
Thirty-three percent of poll respondents said companies seeking help were in worse condition than those seeking help a year ago. That finding appears to bolster results from a spring 2006 TMA poll in which respondents said that struggling companies buoyed by a liquidity glut were delaying fixing operational problems, leading many closer to the brink. Nine out of 10 respondents to this survey anticipated debt default rates increasing by the end of 2007.
"The money that’s been available to companies in decline may be leaking back out of the market. The money is tightening up," said Tom Henderson, an attorney in Houston and Chairman of the TMA Trend Watch Committee.
Three areas on the poll point to turnaround firms’ retooling for the next big wave of restructurings:
Staffing—Thirty-seven percent of respondents added employees in 2006, compared to 32 percent last year.
Consolidation—Seventeen percent said their firms had been acquired or had been in negotiations to be acquired during the past 12 months. Likewise, 24 percent said their firms had either acquired or were in negotiations to acquire another business. In both cases the most frequently mentioned buyer or business to be acquired was another turnaround firm. Nearly half said they had changed or expanded their lines of business in the past year. "The mergers and acquisitions within this industry indicate the maturation of the industry and preparation to increase capabilities to capture a larger market share of what [poll findings suggest] is going to be a busy time for us," said TMA International Vice President of Public Affairs Jim Matthews.
Certifications—35 percent said they plan to increase the number of professionals attaining certifications in their firms, with 72 percent of those identifying the Certified Turnaround Professional (CTP) as the preferred one. This is borne out by the Association of Certified Turnaround Professionals, which reported a 22 percent jump in exams given in 2006 over 2005. "[Firms appear to be] strengthening the bench through more education," said Tom Pabst, Chief Administrative Officer of the Great American Group in Chicago. "Most are looking to push people to get better educated in the restructuring world we live in."
The top four industries currently being served by respondents are:
Manufacturing: 74 percent
Distribution: 44 percent
Automotive: 36 percent
Construction: 30 percent
The poll also found that turnaround professionals are changing how they work, reflecting the unprecedented liquidity in the marketplace, the drop in Chapter 11 bankruptcies, and the effect of the new Bankruptcy Code, which has shortened timelines for exclusivity periods and lease assumptions, among other things. Respondents who said 50 percent or more of their work was done in in-court reorganizations dropped from 31 percent in 2005 to 17 percent in 2006. On the other hand, financial restructurings out-of-court were more plentiful last year, with 41 percent spending half or more of their work in that area, compared to 28 percent in 2006. Others saw opportunities to help healthy companies improve their operations this year, with 22 percent finding half or more of their work in that area.
"The shift in the Chapter 11 process means there will be less time to fix a business inside a court proceeding," said Holly Felder Etlin, TMA Chairman and Principal at XRoads Solutions Group in New York. "The skills to do operational turnarounds on companies in early decline stages will be very important in this next cycle."
Source: The Turnaround Management Association