| Distressed |
© Spectrum Capital Group, LLC. 2005. All Rights Reserved.
© Spectrum Capital Group, LLC. 2005. All Rights Reserved.
Perspective
Maximizing Value Through
Corporate Restructurings
Key Roles Played by Spectrum
Distressed M&A
Recent Transactions
Historical Transactions
Maximizing Value Through
Corporate Restructurings
Key Roles Played by Spectrum
Distressed M&A
Recent Transactions
Historical Transactions
What Is Distressed M&A? The investment banking discipline known as Distressed M&A is a relatively new one, having been formalized during the mid- and late-1980’s at Goldman, Sachs by members of its M&A Department and Restructuring Group, where Spectrum’s Mike Lederman served as one of two Vice Presidents. The immediate impetus for the development of the Distressed M&A discipline was the relatively sudden way that many of that decade’s pioneering LBO transactions found themselves flying off-track. If nothing else, these faltering transactions shared two features above and beyond the ubiquity of too much debt and no access to the capital markets for liquidity: first, declining operating performance and cash flows that practically guaranteed enterprise valuations below those of the original LBO transaction, and secondly, liquidation values that were materially below going concern values. In other words, although these M&A candidates did not have a future as independent operating entities, what they did have was some combination of technology, skilled employees, real estate, customers, distribution, or other features that were worth more to the company’s stakeholders if disposed of together as a going concern rather than in a liquidation. Hence, the essential challenge of Distressed M&A is maximizing value in a context that frequently includes widespread knowledge that the target has no alternative to selling, the inherent disruption of an imminent Chapter 11 filing or one that has recently occurred, low employee morale and high management turnover, and significant liquidity (and therefore time) constraints. On top of all this, the Distressed M&A investment banker may also have to deal with attempts by the target’s out-of-the-money stakeholders to improve their position by threatening to, or actually, disrupting or delaying the sales process, thereby holding hostage the likely recoveries of the target’s other stakeholders. The Role of the Distressed M&A Investment Banker Distressed M&A transactions sometimes have little in common with traditional, friendly M&A deals. The investment banker conducting a Distressed M&A transaction often requires all of the skills of a traditional M&A banker plus a number of other attributes. First and foremost, the Distressed M&A investment banker must be intimately familiar with the requirements of Chapter 11, particularly the provisions of the Bankruptcy Code concerning the sale of the debtor’s assets outside of a Plan of Reorganization. In designing a process for conducting a Distressed M&A sales process, the investment banker must be able to use the Bankruptcy Code to create value and allay the concerns of prospective purchasers and the target’s creditors that arise with regard to issues such as:
The Distressed M&A banker must also have the experience to make decisions and act upon them quickly before the target company runs out of cash, leaving a messy liquidation as the sole alternative. This requires the banker to continually assess trade- offs between time and value throughout the sales process. Executing a Distressed M&A transaction is often difficult. Putting aside the problems inherent in attracting prospective purchasers to a highly regulated auction process with tight time frames and sometimes unsatisfactory due diligence, getting the transaction off the ground can be a challenge principally because the proceeds of the deal are unlikely to satisfy all of the claims on and interests in the company, a sure-fire formula for a contentious zero-sum negotiating dynamic. Success requires that the target’s investment banker and other professionals possess credibility with the company’s creditors and the negotiating ability to convince multiple parties to support the M&A process advocated by the target. A distressed company’s secured creditors, unsecured creditors’ committee, landlords, regulators, taxing authorities, shareholders, directors, and management team may have conflicting and shifting positions with regard to a host of issues, and the Distressed M&A investment banker must have the savvy to get the parties to put these differences aside in favor of executing a sales process designed to maximize value, even if this means putting off to the future existing disagreements over which parties should get how much of the proceeds. To do this, the banker must also be able to communicate effectively with, and leverage off of, the other specialized principals and professionals involved in distressed transactions, including crisis managers, bankruptcy lawyers, bank workout groups, other investment bankers, bond holders, and distressed investors. |
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