Martin J. Whitman Discusses Distressed Investing with Finance Club
"I've learned more about the real world of finance from Marty than just about anyone on the planet," Deputy Dean Stanley J. Garstka said as he introduced Martin J. Whitman, the founder of Third Avenue Management and a legendary figure in value and distressed investing.
Whitman, who taught at Yale for more than three decades, spoke on March 22 as a guest of the Finance Club. He gave students an overview of distressed investing—investing in struggling companies, often approaching bankruptcy—and discussed his own experiences in the field.
When Whitman chooses investments, he said, he looks for companies that need to be restructured, rather than those that need new management. "Businesses get in trouble because they are badly run or badly financed or both," he said. "We concentrate, because of our skill set, on the companies that are badly financed. We're financial people who don't run companies."
One of Whitman's most profitable investments was in the drilling company now known as Nabors Industries. The reorganization of that company in the late 1980s was an early example of a "pre-packaged bankruptcy," in which the company negotiates an agreement with creditors before entering bankruptcy. This type of bankruptcy has since become much more common, he said. "If you are going to rescue anything for unsecured creditors, you'd better pre-package it and get out in a couple of months." A large uncontrolled bankruptcy, such as that of Lehman Brothers or Enron, can cost $1 billion or more.
In putting together a reorganization, Whitman said, it's crucial to understand the priorities of different kinds of creditors. "It's very important to understand where a particular constituency is coming from and what you have to do to satisfy them."
There are many misconceptions about bankruptcy, Whitman said, and especially about the bankruptcies of the large financial companies, auto companies, and other firms during the financial crisis. "There is no such thing as too big to fail," he said. "What they mean is too important not to be reorganized." Many of the companies that declared bankruptcy during the crisis are still in operation, including Chrysler and General Motors. But, he said, "all of these companies did in fact fail. They remained in business with a new capital structure."
Another common misunderstanding that is frequently in the headlines, he added, is the idea that in the United States, we are saddling our children with crippling debt. "One of the important things to understand is that in the aggregate, debt is never repaid" he said. For a credit-worthy entity, whether a company or a government, debt "is refinanced and expanded."