Distressed M&A

When weighing multiple distressed assets that may be available at below book value, potential bidders can become overwhelmed. Having a disciplined approach to due diligence and integration strategy planning is critical.

Fortunately, in the decade since the last cycle of significant distressed M&A, the digital and analytical tools for due diligence and planning have grown more sophisticated. A digital enabler and various AI products can help accelerate the process of analyzing data and information to develop a fuller picture of the target business.

Once there’s clarity on why a transaction is being pursued, attention should turn to identifying value drivers. In distressed M&A, there may not be enough time to devise the complex value creation methods and business models that help traditional mergers succeed. Rather, there needs to be a rapid but relentless focus on the few activities that can create the most value—or at least stop value destruction. The identification of these value drivers can focus negotiations on business integrations and guide overall integration strategy, leading to a successful outcome.

Bankruptcy sales and other distressed transactions tend to throw curveballs. Transaction teams must be prepared to respond with speed and flexibility. Contingency planning should be par for the course. Even when transaction teams are able to develop detailed integration plans, these can be easily disrupted by the decisions of stakeholders and bankruptcy courts.

Given the complexity of a distressed asset transaction and integration, acquirers may miss the mark on determining an appropriate closing time frame. Pushing back against an aggressive close date can compromise the integrity of the deal by diminishing momentum. Similarly, last-minute changes to the close date add uncertainty and can lead to false starts. Attempting to delay a distressed close, if even possible, can also have measurable negative financial impact around asset valuation, decreased customer confidence, increased cost of business integration, and increased personnel attrition due to the overall uncertainty.

Acquirers must appreciate that the timeline to close is not the same as the timeline for integration. For this reason, it is important to mobilize planning teams as soon as an opportunity is identified. Once established, the planning teams can develop an accelerated integration strategy program.

The legal formalities that accompany bankruptcies and other distressed situations will sometimes drag out the transaction and delay the close. The loss of control over business integration and communications can alienate business stakeholders, employees in particular, as the slower pace and confidential nature of discussions often means that employees remain unaware of progress for longer than is typical in a nondistressed acquisition.

Employees need key questions answered sooner rather than later, including the following:

1. Will I have a job?
2. What will be my role in the new organization?
3. Will my compensation or benefits change?
4. Will I be relocated?

Buyers of distressed companies need to be proactive in responding to these queries. As the transaction moves forward, it may not be possible to provide all the answers employees want, but the process of listening to concerns and acknowledging them will help generate trust.

With a bankruptcy, customers and vendors can often be in the dark on transition plans and the impact on their interests. If not carefully managed, potential confusion can amplify their concerns, and competitors may fan the flames. Effective customer retention, brand protection, and strategic communication programs are critical to keeping customers.

Timely and aggressive communication with all external stakeholders is imperative. Distressed asset deals are often surrounded with substantial negative publicity and uncertainty. This boosts the importance of communication not just with the target’s stakeholders, but also with the acquirer’s stakeholder community. The loss of support from one or two critical parties can irreparably harm value. Special attention should be placed on strengthening essential relationships and minimizing extraneous ones.

Transparency, the reliability of financial data, and the predictability of outcomes can help to build trust and earn support among stakeholders.

In distressed M&A, cultural integration is often a more significant factor than in other deals. The acquired operation is often seen as a failure due to its financial situation. This is never the full truth of the target’s situation, and it’s more likely to be a false impression in this cycle, when otherwise strong companies have been rapidly brought to their knees by the shock of the pandemic.

Many distressed M&A deals that don’t work well flounder on the shoals of culture and an attitude of we won, you lost. Before corporate cultures can be combined, established, or replaced, it’s important to decide how much integration is appropriate. From this decision, organizational structure and leadership changes will follow, and these will facilitate integration. Management must decide what to adopt or reject from the target in order to achieve the desired culture.

Communication and actions are key to a successful cultural integration strategy because they can help alleviate the uncertainty and concern felt by employees during the acquisition. Management can foster open communication by providing consistent messages to all employees and setting balanced expectations.