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4 October 2010
While the downturn in the economy may mean the culling of a growing number of corporate deals, the corporate techniques themselves are being hijacked by companies to deal with debt.
I am, of course, referring to outsourcing. Take Dublin-based computer manufacturer Gateway - which has just signed a deal with Dublin-based multinational firm ClientLogic - agreeing to outsource both its assets and its services. In September, the computer giant announced that it was closing all its non-US operations, including its main European office, based in Dublin. But, rather than selling its assets, the company put out an invitation to tender to outsource the Dublin office in its entirety.
Three weeks later ClientLogic won the tender and a month on the deal was completed. Dublin firm Mason Hayes & Curran, led by corporate partner John Kehoe, advised ClientLogic, and the Dublin office of Arthur Cox advised Gateway.
Gateway's problems stem from unsuccessful European sales and the closure reflects the depth of the problem. However, the company is still solvent and it was therefore able to convince the service provider that it would honour the obligation of its contract.
This may not be the first time an entire business has been outsourced, but it is worth noting that in this case outsourcing is being used as an alternative to business restructuring. Gateway saves its assets while transferring its liabilities. The expectation is that when market conditions improve and PCs are once again in demand, the company can resume its own provision of services.
Most outsourcing deals take place when companies have too many assets on their books and want to realise the cash value. However, in the case of Gateway, the company used outsourcing as a means of getting debt off its balance sheet and giving the operation a long-term chance of survival.
So, while the structure of the Gateway deal is the same as with any other outsourcing deal, the circumstances surrounding the deal are different.
Gateway's closure saw the biggest single loss of jobs in Ireland since Seagate closed in Clonmel in 1997. In fact, almost 600 staff were made redundant following the announcement of the closure. But the agreement with ClientLogic managed to save jobs for more than 150 people, all of whom were transferred under the Transfer of Undertakings (Protection of Employment) Regulations 1981. Gateway's Dublin operation has been left as a hollow company, with just the name surviving.
Market sources predict that this technique is likely to become more prevalent in sectors currently suffering. Already a huge number of IT and telecoms companies have too much inventory on their books which they are unable to sell. But, with a number of other sectors hitting hard times, the possibilities for these sorts of deals are endless.
ClientLogic is not particularly active in Ireland, although it does provide outsourcing services to Siemens' Irish operations. But with Gateway, ClientLogic has seized a contract with a blue chip name and a number of skilled employees, which it can then use for other services. As long as it maintains the service levels within the agreement, it has the additional use of skilled labour, which six months ago was difficult to find.
Maybe restructuring lawyers should start working more closely with their corporate counterparts, killing two birds with one stone. Corporate lawyers sitting around twiddling their thumbs may suddenly find themselves the centre of attention, while finance teams might see some of the pressure relinquished. So, sit up and take note.
Lawyers are predicting that we will see outsourcing methods used more frequently and that corporate lawyers will more readily be drafted in to deal with the refinancing of troubled companies. Which is surely a positive move if it means preserving businesses which would otherwise be toppled in this current climate? Desperate times require desperate measures.
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