Investments in restructurings can be significant performance contributors in a portfolio

Equity investments in company restructurings are often shunned by investors and fund managers. Indeed, who would be willing to invest in a company when it is not yet clear that a realignment will be successful, or to defend their decision-making to investors following the unsuccessful restructuring of a company in the portfolio? However, this is precisely why, in the case of a successful restructuring, commitments can feature significant prospects of high profits – in many cases even considerably more than 100 percent.

Reasons for restructuring 
There are many reasons as to why restructuring measures can be a necessary cause of action. Frequently, it’s down to the management or to a cost base that is too high. In many cases, however, it is also a result of changes in the market environment. For example, overinvestment or weaknesses in demand, whether structural or cyclical, can lead to overcapacities. Likewise, a change in the competitive environment can encourage competing companies with a superior cost structure to lower their prices, thereby dethroning more established companies. This often results in a loss of competitiveness and an accompanying decline in margins, or even negative results. In such cases, a restructuring can bring the companies back on an extremely successful course – if they have the desired effect.

Important factors for success 
Whether a restructuring is successful or not depends on a range of different factors. First of all, it is crucial that the company is not experiencing issues with the product spectrum. If the company has no products with which to compete with rivals, it may be able to improve its cost position in the short term, but will lose market shares in the future or will be forced to lower prices to keep up with the competition. The consequence is that any positive effects from the restructuring are devoured by the negative effects of falling prices and volumes. A further important success factor for restructuring is the flexibility of cost structures. For example, a capital-intensive company with large production facilities will pose a particular challenge in a restructuring, while the relocation of production to new locations and the adjustment of the workforce are often cost-intensive. The balance sheet is yet another aspect in the analysis of restructuring investments. A good balance sheet is needed in order to offset potential exceptional write-downs with equity capital. Severance payments or investments are commonly required if restructuring measures are to be implemented quickly and fully. Often, a new management team with special expertise in adjustment processes will be of great assistance.

An example of a successful realignment 
One real-world example of a successful restructuring is the printing press manufacturer Koenig & Bauer. Due to the declining market for print media, volumes have fallen for machines in the field of ​​newspaper printing. The company had too much capacity and was not flexible enough to absorb the low volumes. Consequently, the profitability took a hit and an adjustment of the cost structure was unavoidable. The good success prospects for the company were underpinned by a very healthy balance sheet structure alongside an innovative product portfolio in the field of packaging and security printing. Furthermore, the management was resolved to focus consistently on the adjustment processes, as painful and challenging as they were. A board member with experience in restructuring was also appointed. Following high exceptional depreciations, the company has successfully increased profitability year after year. Today, the company is out of the restructuring phase and is once again concentrating on organic sales growth. For the intrepid investors, an early commitment paid off, with stock that has more than quintupled in value over the past three years.

How can investors benefit 
A great deal of research, expertise and analysis is needed in order to identify companies whose restructuring measures have a high chance of success. Such stock picking of potentially undervalued companies demands precise knowledge not only of the general market situation but also of the sector and product landscape, among other areas. Moreover, in order for such an investment to be meaningful and promising, the balance sheets, restructuring measures, quality of management and growth potential must all be sufficiently examined and tested.

Two funds that have always enjoyed great successes in this regard are the MainFirst Germany Fund (ISIN: LU0390221256, unit class A) and the MainFirst Top European Ideas Fund (ISIN: LU0308864023, unit class A). These are managed by Olgerd Eichler, Alexander Dominicus and Evy Bellet, three fund managers and experts with a total of over 60 years of experience in a range of market segments, which has enabled them to invest consistently in underrated companies that have later gone on to yield profits of over 100 percent.