Distressed M&A, also known as buying companies in bankruptcy or distressed acquisitions, refers to the process of acquiring companies that are facing financial difficulties and have filed for bankruptcy protection. When a company is in financial distress, it may be unable to meet its debt obligations and seeks protection under bankruptcy laws to restructure its operations or liquidate its assets.
Acquiring a distressed company can present opportunities for investors or other companies looking to expand their operations or acquire assets at a discounted price. The acquisition process in distressed M&A typically involves several key steps:
Identifying distressed companies: Investors or acquirers actively search for companies that are in financial distress and have filed for bankruptcy protection. They may work with bankruptcy advisors, investment banks, or other professionals to identify potential targets.
Conducting due diligence: Once a potential target is identified, the acquirer performs a thorough due diligence process to assess the financial condition of the distressed company, its assets, liabilities, potential liabilities, and overall business prospects. Due diligence helps the acquirer evaluate the risks and opportunities associated with the acquisition.
Developing a restructuring plan: If the acquirer determines that the distressed company is a viable acquisition target, they develop a restructuring plan. This plan outlines the strategies and actions to be taken to turn around the target company’s financial situation, improve its operations, and create value.
Negotiating and obtaining bankruptcy court approval: In distressed M&A, the acquisition process often requires approval from the bankruptcy court overseeing the target company’s bankruptcy proceedings. The acquirer negotiates the terms of the acquisition with the target company and other relevant parties, such as creditors and the bankruptcy trustee. The bankruptcy court must ultimately approve the transaction.
Closing the acquisition: Once the bankruptcy court approves the acquisition, the parties complete the necessary documentation and finalize the transaction. This may involve the transfer of assets, assumption of liabilities, and restructuring of the target company’s operations.
It’s important to note that distressed M&A can be complex and carries inherent risks. The financial difficulties faced by the target company may require significant investments, operational changes, or market turnarounds to achieve a successful outcome. Acquirers should have a comprehensive understanding of the distressed company’s financial situation, industry dynamics, and potential challenges before proceeding with such acquisitions.