If It Looks Too Good To Be True, …….

I have recently heard two financing stories that remind me of the old adage that if it looks to good to be true, it probably is too good to be true.

A friend of mine has a really nice company. He is doing a financing. He had an investor group lined up that didn’t want to pay the valuation he was looking for. But he liked them and was working on closing a deal. There were some issues getting in the way, but he was working through them. Then along came another investor offering a much better deal, one that met his valuation target. Initially he rebuffed the new investor, but when the issues with the first deal became more difficult to resolve, he was forced to move to the second investor at the higher price. After much work on both sides, the new investor decided that they would move forward, but only at a price that was more or less equal to the first deal. My friend’s company will be fine regardless of what he does since he doesn’t really need the money, but they wasted a lot of time and energy on these deals and ended up right back where they started.

The second one is worse. It’s a story I heard this week about a debt financing for a company that took place several years ago. The company was in need of a refinancing and it was at a time in the market when refinancing debt was very hard. It was a bleak situation. Then along came a group that represented some union pension funds. This group arranged a debt financing by the union pension funds. And they got paid a nice fee for doing that. They had a small ongoing interest in the investment itself but the upfront fee was a very large part of the compensation. The debt financing was provided on very attractive terms for any market environment, and amazing terms given the market environment at that time. Well it turned out that the agent representing the pension funds was giving a portion of the fee back to the pension fund managers. This all came to light. Some people involved went to jail. The company got deeply involved in the mess, went into a restructuring, and the original equity holders were wiped out.

These are not good stories. But they are the kind of stories that you need to hear every once in a while to remind yourself that too good of a deal is exactly that.