Retaining Partners During a High Profile 363 Sale

Founded in 1983, The Monitor Group was a leading global strategic consulting firm with 700 professionals located in 27 offices across 18 different countries. Monitor specialized in consulting to senior management of corporations and non-profit organizations on business strategy, organization and leadership, innovation, economic development, market pricing and social action. The Company was founded by entrepreneurs tied to the Harvard Business School, including Michael Porter, one of the most cited scholars in economics and business strategy.

Following the financial crisis of 2008, Monitor experienced a dramatic lag in consulting work as companies cut back significantly on pure strategy consulting. Monitor’s business was also hurt from significant reputational damage deriving from a consulting project promoting the country of Libya, and its then leader, and a $12.5M settlement paid to Hallmark for the alleged improper use of proprietary information.

The drop in business resulted in a layoff of nearly 20 percent of Monitor’s employees and prompted the partners to advance $4.5 million to the Company, leading to the deferral of three years bonuses. These factors on top of the cash costs to pay off the founders when Monitor became a fully partner-owned firm, caused a liquidity crunch that the Company ultimately could not recover from – despite borrowing ≈$50M million in mezzanine debt financing. Beginning in September 2012 the Company was unable to pay rent at the Cambridge headquarters and defaulted on interest payments to the mezzanine debt lender. This forced Monitor to evaluate strategic options, including the sale of the Company which ultimately had to be executed through a Chapter 11 Section 363 sale.

 Due to its deep expertise dealing with bankruptcies in the professional services industry, Carl Marks Advisors was hired by Monitor to serve as both Chief Restructuring Advisor and Investment Banker to work and advise on all aspects of the Chapter 11 filing and the Section 363 sale process. In the sale process, Deloitte, who sought to increase their position in strategic consulting on a worldwide basis, was selected as the stalking horse bidder.

The transaction structure of the sale included the acquisition of Monitor’s U.S. entities through a Chapter 11, 363 sale and a stock acquisition of all other global entities, with the except of the Russian consulting entity. A key challenge for the Carl Marks Advisors team as well as the Monitor management team was to maximize sale proceeds and deliver the business as a going concern to the eventual buyer. The Deloitte bid required the retention of 92% of Monitor’s global professional staff despite the fact that competitors were attempting to poach key partners, and in some cases entire foreign country offices.

Another hurdle to overcome during the sale process were objections to the sale raised in court which were ultimately resolved by Carl Marks Advisors expert testimony which ensured that the sale was approved.

Carl Marks Advisors ran a robust sales process for Monitor with Deloitte as the stalking horse bidder, which increased the offer price significantly and also ensured funding of expenses of the Chapter 11 estate.

The Carl Marks Advisors team helped successfully negotiate an attractive transaction structure that incentivized employees to stay on at the newly formed Company. During this transition period, Deloitte loaned personnel an amount of money equal to their previously forgone bonuses. This loan would be forgiven if the employee did not leave Deloitte within their first three years of service. Simultaneously, any partner Deloitte wanted to retain but did not sign on with the new Company faced the threat of the Chapter 11 estate pursuing recovery of the draw they were paid at a time when the business was deemed insolvent. Using this carrot and stick approach, Deloitte was able to sign-up more than 92% of Monitors’ global partners and professional staff which allowed the sale transaction to successfully close.

The combined Company was strategically re-named Monitor Deloitte (as opposed to Deloitte Monitor), and the Company has since grown in size and stature in the marketplace.

• A comprehensive communication plan for reaching internal and external stakeholders and a well-constructed deal structure can hold a partnership together throughout a complex bankruptcy and sale process. A “Carrot and Stick” approach can be quite effective to incentivize partners to stay on through the transition.
• Going into bankruptcy with a complete stalking horse asset purchase agreement and a restructuring support agreement between the applicable stakeholders can greatly increase outcomes for a successful sale.
• An experienced financial advisor can provide expert testimony in a contested sale hearing to aid in the successful approval of a sale.