Restructuring / Distressed M&A 2 Flashcards
Normally in a sell-side M&A process, you always want to have multiple bidders to increase competition. Is there any reason they’d be especially important in a distressed sale?
Having multiple bidders would be amazing in a distressed sale. Given the condition of the company you have almost no negotiating leverage. The only way to potentially increase the sale price for your client is by generating competition among multiple bidders.
The 2 basic ways you can buy a company are through a stock purchase and an asset purchase. What’s the difference, and what would a buyer in a distressed sale prefer? What about the seller?
A stock purchase involves acquiring 100% of the company, including all its assets and liabilities. In contrast, an asset purchase allows the buyer to acquire only specific assets and assume only certain liabilities, giving them more control over what is acquired. Asset purchases are more common in smaller companies, particularly in divestitures and distressed M&A situations. Larger, healthier companies are typically acquired through stock purchases. Buyers usually prefer asset purchases because they allow for greater control over the assets and avoid assuming unknown liabilities (they also get certain tax advantages). Sellers, on the other hand (of distressed companies), will almost always prefer stock purchases. This allows them to transfer all liabilities to the buyer and can also result in more favorable tax treatment compared to selling just assets.
Sometimes a distressed sale does not end in a conventional stock/asset purchase – what are some other possible outcomes?
Other possible outcomes could be:
a. A foreclosure (either official or unofficial). Typically occurs when a company has defaulted on secured debt
b. A general assignment, which is a faster alternative to bankruptcy
c. A Section 363 asset sale, which is a faster, less risky version of a normal asset sale
d. Chapter 11 bankruptcy
e. Chapter 7 bankruptcy
Normally M&A processes are kept confidential – is there any reason why a distressed company would want to announce the involvement of a banker in a sale process?
In a distressed sale, a company might announce the involvement of a banker to attract more bidders and increase competition, driving up the price. This can sometimes happen with regular M&A deals as well.
Are shareholders likely to receive any compensation in a distressed sale or bankruptcy?
Technically, the answer is “it depends”, but typically, the answer is a “no”.
Let’s say a company wants to sell itself or simply restructure its obligations – why might it be forced into a Chapter 11 bankruptcy?
A company might be forced into Chapter 11 bankruptcy due to pressure from aggressive creditors. When they can’t agree on restructuring terms or finalize a sale, creditors may turn to court, forcing the company into Chapter 11 by accelerating debt payments. This allows the company to restructure its obligations under court supervision while continuing operations.
Recently, there has been news of distressed companies like GM “buying back” their debt for 50 cents on the dollar. What’s the motivation for doing this and how does it work accounting-wise?
Distressed companies like GM buy back their debt at a discount to reduce their overall debt obligations and interest expenses. By repurchasing the debt for less than its face value, the company can cancel a portion of its debt at a lower cost, improving its financial position. This strategy is effective because the cost of repurchasing the debt is less than the future interest payments and principal obligations that would have been due if the debt remained outstanding. Accounting-wise, the company’s cash balance decreases, and the debt on the liabilities side of the balance sheet is reduced. The difference between the debt’s face value and the repurchase price is recorded as a gain on the income statement.
What kind of companies would most likely enact debt buy-backs?
Most likely over-levered companies – ones with too much debt – that were acquired by PE firms in leveraged buyouts during the boom years, and now face interest payments they have trouble meeting, along with excess cash.
Why might a creditor might have to take a loss on the debt it loaned to a distressed company?
A creditor might have to take a loss if it is a lower-priority creditor. Secured creditors, who have claims backed by specific assets, are paid first and have a claim to the proceeds of any asset sales before unsecured creditors. The lower a creditor’s priority, the less likely they are to recover the full amount owed to them, resulting in a potential loss.
What is the end goal of a given financial restructuring?
The end goal of financial restructuring is to modify the terms of a company’s debt to improve its financial stability and viability. This may involve changing the terms of interest payments, adjusting principal repayment schedules, or revising covenants to better align with the company’s current financial situation and future prospects.
What’s the difference between a Distressed M&A deal and a Restructuring deal?
Restructuring is one possible outcome of a distressed M&A deal. A company can be distressed for many reasons, but the solution isn’t always to restructure its debt. It might file for bankruptcy, liquidate and sell off its assets, or be bought out by another company. “Restructuring” specifically refers to changing the terms of a company’s debt obligations to make them more manageable and improve its ability to pay them off in the future.
What’s the difference between acquiring just the assets of a company and acquiring it on a “current liabilities assumed” basis?
Acquiring just the assets of a distressed company means you literally just get its assets, such as equipment, inventory, real estate, etc. However, when you acquire it on a “current liabilities assumed” basis, you’re taking on its liabilities as well. Since a distressed company’s working capital can be extremely skewed, you need to make adjustments for the “owed expense” line items in the Accounts Payable and Accrued Expenses sections of the Balance Sheet. These liabilities are often much higher than they would be for a healthy company, so you need to account for this when assuming the current liabilities. This usually results in a deduction to your valuation, meaning the purchase price is often lower if you’re assuming the current liabilities.
How could a decline in a company’s share price cause it to go bankrupt?
A drop in a company’s share price can lead to a loss of confidence among customers, vendors, suppliers, and lenders, making them more reluctant to do business with the company. This loss of confidence can cause revenue to fall and accounts payable and accrued expenses to rise to unsustainable levels. While a sudden share price decline itself doesn’t directly cause bankruptcy, it can create a ripple effect that weakens the company’s financial position, potentially leading to failure or the need for additional capital.
What happens to Accounts Payable Days with a distressed company?
They rise and the average AP Days might go well beyond what’s “normal” for the industry – this is because a distressed company has trouble paying its vendors and suppliers.
Let’s say a distressed company wants to raise debt or equity to fix its financial problems rather than selling or declaring bankruptcy. Why might it not be able to do this?
A distressed company might struggle to raise debt or equity due to its poor financial condition. Investors may be reluctant to provide capital, especially if they doubt the company’s ability to execute a credible turnaround plan. For debt, lenders might refuse to extend credit, fearing that the company won’t be able to repay. For equity, the situation can be even more challenging. Equity investors, who rank lower than debt investors in terms of repayment priority, may be even less willing to invest. Additionally, given the company’s depressed market value, raising sufficient equity could require selling a significant portion—potentially 100%—of the company.
