Sunday, May 4, 2008

Turnarounds and Distressed Company Decision Making

I remember thinking about incentives during a restructuring course I took a couple of years ago:Consider a pre IPO company whose value has been falling, and it's liquidation value is now close to its debt value (we have all heard of a startup that burnt through its cash). The management has an option to make an investment that is 3x as risky as any they have considered so far.

Should the management optimize:
1. shareholder value?
2. company value?
3. creditor value?

At an interesting case study session recently- amidst turnaround professionals- an insight was that the legal "line in the sand" varies from state to state, besides varying from country to country.

What do you think?

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