The truism that every crisis brings about opportunities also applies to mergers and acquisitions (M&A). The COVID-19 pandemic provides ample opportunities for corporate buyers to enter a new market or expand their existing portfolio through acquisitions – for attractively low prices. However, investors will need to be alert to numerous peculiarities of such deals made with a business in crisis, commonly called 'distressed M&A'. These include the following.
Choosing a target
Companies in crisis seeking to divest businesses may be widely known. If they are not, the right network will help spot the opportunities.
Due diligence on a distressed M&A transaction is indispensable even when there is urgency and some appetite for risk, but the process may need to be accelerated and more targeted. The review will need to focus on specific areas prevalent in times like these (eg HR measures taken by the target, supply chain and other issues with operational agreements triggered by the pandemic, use of government support and compliance with its terms, and compliance in general in these unprecedented times, to name a few).
The sales process may have to be completed quickly, because the seller is running out of money. It is not uncommon, however, for banks, customers and suppliers to give time for a properly organised sales process to maximise proceeds.
Dealing with the right people
Bidders will need to identify the right person to negotiate with. Even outside insolvency, the main creditors are often the drivers of the sales process. In many cases a so-called chief restructuring officer (CRO) will manage the process. In insolvency proceedings, the receiver will be the key person. Key customers and suppliers may also need to be brought on board.
In the current climate, it will be particularly difficult to agree on the purchase price. Earn-outs or similar tools, which provide for an adjustment of the purchase price at one or more points in the future, can help bridge any gaps.
The buyer may demand the possibility of being able to terminate the transaction right up until closing if certain material adverse events occur, such as a further significant deterioration in the financial situation of the target company. Conversely, transaction security is of paramount importance for the seller.
Buyers will be keen to leave behind undesirable parts of the target business and, above all, liabilities. Every structuring option (most notably asset deals and demergers) has disadvantages and must be weighed against each other. Many deals will involve the separation of the target business from the remaining business of the seller, which can be complex and time consuming. When structuring a transaction outside of insolvency, it is paramount to ensure that the acquisition is not open to clawback, meaning that it cannot be contested or otherwise reversed in the event of a subsequent insolvency of the seller.