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You’ve found your distressed investment opportunity, honed your strategy and performed your due diligence. Now you’re tasked with structuring the deal in a way that will help you meet your goals and deliver sustained value. How you structure and position your offer can often make the difference between success and failure in a competitive distressed merger and acquisition (M&A) process.
Should you buy assets or restructure the company to acquire and control the existing equity?
An asset purchase can provide greater flexibility from a restructuring perspective and can eliminate the need for a plan of compromise or arrangement in a formal restructuring. In a court-driven restructuring process, buyers are often attracted by the ability to purchase assets free and clear by way of a vesting order. An acquisition of shares can preserve valuable tax attributes but adds the complexity of successfully completing a plan of compromise or arrangement. The correct path will depend on your risk tolerance and the specific circumstances of the opportunity.
Distressed M&A can be complex. Unlike a conventional transaction, where shareholders typically select the winning bidder, a distressed M&A process may have varying degrees of input from many different stakeholders, such as trade creditors, lenders, shareholders, pension committees and unions.
Understanding the motivations and objectives of each of the critical stakeholders can be a powerful tool in increasing the attractiveness of your bid.
These are all important considerations in structuring your transaction and positioning your offer for success.
Speed, certainty and simplicity in your proposed capital structure are often key to winning the deal. Distressed M&A transactions are completed on tight timelines, so a deal that’s ready to execute with little closing risk is often preferred to a deal that may offer a higher price but comes with conditions, such as a financing clause or diligence condition that increases the uncertainty associated with closing the deal.
Another way to get your offer to stand out is to provide additional liquidity and capital to the business to help calm nervous customers and creditors and put the company in the best position to affect a turnaround. New capital and liquidity can be a powerful competitive advantage in a distressed situation. Often, a company’s distress is caused by a liquidity crisis—whether it’s company specific or due to a macro event. And as the company’s liquidity options wane, new capital becomes more and more valuable.
Distressed M&A transactions and, in particular, transactions completed within formal restructuring proceedings provide opportunities to be much more creative in tailoring your capital structure to meet the needs of both the business and its stakeholders.
Common strategies in structuring distressed transactions include the following:
Since distressed M&A transactions involve uncertainty, it’s critical to plan for contingencies when you structure them. Make sure the amount and structure of your financing is consistent with the findings of your due diligence and your turnaround plan.
Experienced distressed investors often start by using a flexible financing structure. This may be more expensive, but you can refinance it with a more permanent capital solution on better terms once you can show an effective turnaround to lenders.
While these are some of the common strategies that experienced distressed investors use in a transaction, there are more considerations:
Once you’ve structured your deal, it’s time to close it with confidence, which we’ll cover in the next post.