Creating Value through Corporate Restructuring - Case Studies in Bankruptcies, buyouts and breakups.

A valuable study of the US solution for helping businesses ride out economic shocks.

As you would expect from a professor at Harvard Business School, this book has a number of good points. Directed at students, Gilson's use of English is mercifully clear and devoid of academic jargon, while financial terms are concisely explained. It will provide non-US readers with some fascinating insights into the US business world, through the case studies. The book also enables readers the chance to contemplate one of the miracles of the US financial system, Chapter 11 of the bankruptcy code.

Bankruptcies are just one third of the book, but this section is most relevant to Chinese readers, since the whole concept of bankruptcy in China is only just beginning to emerge.

But what is bankruptcy? It's not necessarily going into Chapter 11, although this part of the Bankruptcy Code. It could be liquidation, as set out in Chapter 7, which is the common definition of bankruptcy in the United Kingdom. Liquidation is essentially the death of the firm, where agents of the law, acting on behalf of creditors, step in and ruthless take over and sell assets of the defaulting firm, with the proceeds going to the creditors.

That makes Chapter 11 so special. Chapter 11 give a company which has run into difficulties, perhaps simply because of foreign exchange rate fluctuations, a chance to regroup and emerge healthy with the slate wiped clean.

Chapter 11 is normally employed by large, publicly-listed firms, since the company's commercial operations tend to be seriously disrupted and professional fees for lawyers and investment bankers are high.

Going into Chapter 11 is not automatic. The company must prove that the value of the company as a 'going concern' is greater than the value the company would generate were it to be broken up and sold. A judge is appointed to determine whether that's likely. He then also supervised the process whereby the interested parties, in the first instance the company itself, but later also creditors, put forward plans for returning the company to profitability, such that it can leave Chapter 11 with all claims paid off.

The claims on the firm are divided into classes according to their nature. Thus bank loans would represent one class, while other classes represent senior debt and junior debt. Each class votes for one or several plans.

The passage of a plan can be either consensual, or it can be non-consensual. Even if one or more classes hold out against a plan, the judge can impose the plan onto them as long as the resisting creditors get at least as much as they would in the case of a liquidation.

Chapter 11 is by no means a panacea, with the author estimating that one in three firms declare bankruptcy a second or a third time. However, the process provides a series of sophisticated alternatives to simply winding the company up.

Gilson points out that there is need for such an instrument, since bankruptcies and other restructurings are increasing part of the business landscape. That's possibly due to wide-spread deregulation, increased competitiveness, and accelerating technological change. Chapter 11 thus provides a kind of buffer for all parties concerned to work together in resolving these disputes. That can be especially rewarding if a firm if facing trouble from a specific issue. Continental Airlines , for example, went into Chapter 11 specifically to destroy the power of the unions which had led to the company having one of the highest cost base in the industry. Under the conditions of Chapter 11, the company was allowed to abrogate its contracts with the unions and shed 65% of its work force. Not surprisingly, the company rapidly re-entered profitability.

That shows the numerous advantages that a company gets under Chapter 11. A company may stop paying interest on its loans. It may renegotiate or terminate many contracts it made within a certain period of time before the bankruptcy. It can even obtain new loans thanks to a mechanism which raises the new lender within the repayment hierarchy, thereby reducing the lender's risk, and providing the company with a cash infusion.

Chapter 11 is important because the assumption that underpins it is that a firm is more than the sum of its parts. A liquidation could be especially destructive if it is the result of a temporary cash shortage, or a one-off disaster such as the Asian Financial Crisis. Chapter 11 therefore acts as a creator of value.

Other advantages of the book include some highly detailed appendices for every case study. However, the case study approach sometimes forces Gilmore to repeat himself, in a way that a more thematic study would not. One especially infuriating aspect is the way that the case studies do not inform the reader how the restructuring turned out. That's perfectly suitable for students, who are obviously meant to select appropriate option after careful reflection. But to the non-student reader, such an approach means that he is unfortunately deprived of significant value.