Two approaches to Turnaround

Continental European countries have long differed strongly from Anglo-Saxon countries in their approach to distressed companies. Whilst in America a money-losing operation is readily closed down, in Europe we try to turn them around – at all costs.

The stark difference in approach would appear to take its roots in economics: the liquidation value of a European company is seldom positive. The cause is both that the liquidation process is not conducive to optimal monetization of assets and that terminating employees is usually very expensive.

But in reality, at the heart of this situation lies a profound cultural difference between Anglo-Saxon and continental European business culture: the belief that companies are not a thing of the shareholders alone: other stakeholders matter, and liquidation should be deterred because it would create negative externalities for them and maybe for society as a whole.

So profound is this belief that courts and the governments are willing to take the risk to distort competition by allowing companies to survive unduly, will take an aggressive initiative to sue indiscriminately managers who file, and even finance the most unlikely projects (see covid PGE).

In short, all works as if the legal term of moral persona is being taken literally as meaning a company is a human being and therefore his life is priceless. Turnaround investors have well understood this state of affairs and have exploited the opportunity that it creates with two different business models: option value investing and industrial value investing.

Thomas Kermorgant