Q -Alexander, your history with btov goes back to the years 2004/2005 when you got to know btov in two respects. You had just successfully merged your laser company with an English competitor and had gone public on the AIM in London. In turn, you were looking for new investment opportunities as a private investor and decided to invest through btov. You also introduced btov to 4G at that time, as you had just founded the company 4G Systems specializing in End User Terminal Equipment for UMTS, i.e. UMTS Surf Sticks. This can be regarded as the precursor of today’s Internet of Things concept with a different technology. btov, however, did not invest and you had to experience the kind of pressure Chinese companies are capable of putting on a market segment. In 2007, the year before the real estate crisis, you purchased a company for IoT modules together with a Dax 30 corporate (let’s call it Corp), a Private Equity firm and also btov on a smaller scale.
How did you experience the real estate crisis in 2008 with your former company? How did the investors react to the crisis?
AS -Before 4G Systems went bankrupt it purchased its core technology from a wireless modules department of another German Dax company that developed the basic technology for surf sticks and were the market leader in this field. Corp intended to address this market and wanted to provide it with connectivity as every module sold also includes a mobile phone contract and, consequently, a recurring revenue. In 2007, we bought this department with me as lead in a carve-out in an intensive bidding process. We had a significant equity stake, the rest was financed by a debt investor (let’s call him X), and others. The company was very healthy, sales were at 250M Euro, and we had an EBIT level of about 15%. I was Chairman of the Supervisory Board and supported the company on the management level as well. Then came 2008 — Lehman. At the beginning we were not sure whether this crisis would have any impact on us at all. But the crisis shook our customer base. Various customers especially in the automotive sector started to cancel call-offs and urged us to stop deliveries. As a result sales fell by around 50% within two months. Beyond that all financing covenants were torn, especially those of the debt investor. The debt investor estimated the crisis as being only temporary and saw his chance to take over the company at a very cheap price via a dept-equity swap. And still — after a hard battle in bankruptcy and a distress sale to a large digital security company (we’ll call it SecCo) — we managed to save a significant portion of our equity.
Q -How could this predicament come about and how did you manage to avert the worst case scenario? What are the lessons you learned from this crisis?
AS -Although our company had around 35M Euro cash in its account the termination of the financing forced the management to file for bankruptcy. This led to a forced situation, an effect that X was not averse to as it seemed obvious that the company was healthy and the crisis’ negative effect would be short-lived. Furthermore, the shareholder base was too complex to react in a reasonable way. Apart from X we primarily had a PE fund and Corp with us. The former was massively pushed up against the wall by the crisis and as a result defaulted capital calls. Corp was inert — a typical corporate at the time. I was able to convince Corp to place a counteroffer in the insolvency proceedings together with me in order to raise the price of the fire sale. The asset was so interesting that fortunately, a bidding dispute crystallized between two other competitors of our company. One of them was SecCo who ended up acquiring the company. This resulted in a sale price that was below our original one but not nearly as bad as many had expected. In the end we were lucky with the insolvency proceedings. Without an insolvency administrator who showed personal interest and enforced the principle to grant the best economical outcome of exploitation right (“Bestverwertung”), we would have had a worse outcome.
One of the lessons learned from this situation is that you have to be extremely careful who you get involved with. You be sure of your investors intentions. Secondly, it is crucial to act quickly and consistently in a similar crisis. In case of doubt, you should try to guide a healthy and substantial company through insolvency and attempt to establish a new set-up with the banks. Banks can be quite helpful in this context and can support the former owner to get back on the horse. Of course, one should try to avoid a similar situation in the first place as it requires the owners and the management’s undivided attention. During these extreme circumstances a regular day-to-day business becomes impossible. If you run your business efficiently and properly, you manage to overcome a crisis quite well. Companies with sufficient reserves can easily survive 1 to 2 years of crisis without the support of banks. On the other hand, companies with a smaller financial reserve will not be able to last longer than a maximum of 3 to 6 months and will certainly have a higher risk of getting into a situation similar to ours.