With the COVID-19 crisis, we suddenly find ourselves, once again, in an extremely challenging economic environment, one that many companies are unprepared to face. Many will not survive the economic fallout from the pandemic. Many others will persevere, some perhaps even thrive. They will have the opportunity to strengthen and expand their own footprints by salvaging promising companies that now find themselves in distress. Those deals will look dramatically different from the deals to which most strategic acquirers have become accustomed. For a buyer, adjusting to the rules of the road in the world of distressed M&A may be the most challenging part of a transaction with an insolvent company.
While 2020’s crisis is caused by different factors than 2008’s, the resulting increase in distressed M&A activity may ultimately be strikingly similar. Buyers should prepare for this change in the M&A landscape and be ready both to accept the challenges and seize the benefits of the various types of transaction structures for acquiring distressed assets. Understanding the risks and benefits of distressed company M&A and how to use structuring to achieve the right balance will help buyers navigate an unfamiliar road to what just might be a very beneficial transaction.
Distressed company M&A involves risks that don’t exist in a non-distressed situation, and the buyer often can’t avail itself of the otherwise standard contractual protections, such as indemnification provisions, it would have in a typical transaction. On the other hand, depending on how the transaction is structured, acquirers may find that the protections afforded by the bankruptcy code present a better mechanism for avoiding the assumption of unwanted liabilities than is available in a non-distressed deal.
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