Bankruptcy Verite

Abstract:     
In Bankruptcy Fire Sales, 106 Michigan Law Review 1 (2007), we compared the recoveries from the going-concern bankruptcy sales of 25 large, public companies with the recoveries from the bankruptcy reorganizations of 30 large, public companies in the same period. We found that, controlling for the asset size of the company and its pre-sale or pre-reorganization earnings (EBITDA), reorganization recoveries were more than double sale recoveries.

In Bankruptcy Noir, a reply forthcoming in the Michigan Law Review, Professor James J. White values the same set of companies differently to reach the finding that the sale recoveries are not statistically significantly different form the reorganization recoveries.

In this response to White's reply, we demonstrate that the difference in White's findings results entirely from four errors in White's method. First, White values grossly insolvent companies based on their debts rather than their assets, thus creating phantom assets at filing even the companies themselves did not claim. Second, in comparing the sale and reorganization recoveries, White deducts current liabilities from the reorganized company recoveries without making the corresponding deduction from the sold company recoveries. Third, after deducting those current liabilities B which are a proxy for cash and other current assets B White deducts the cash a second time. Here too, he makes the deduction from the reorganization recoveries, but not from the sale recoveries. White's fourth error was to drop from his study the seven sale cases with the lowest recoveries. He attempts to justify their removal on the ground that they were unreorganizable telecoms. But he acknowledges that two were not telecoms, he retains seven higher-recovery telecoms in the study, and he provides no evidence that the companies dropped could not have been reorganized.

Number of Pages in PDF File: 22

Keywords: bankruptcy, 363 sales, James J. White, liquidation, total enterprise value, enterprise value, reorganization, recoveries, telecommunications, CLECs, mergers and acquisitions

JEL Classification: K22, G33, G34

Accepted Paper Series