Distressed M&A

Finding opportunity and value amid the risks

Distressed asset deals typically come with special risks and complexities. The ongoing pandemic and economic turmoil will likely accentuate these intricacies and, by extension, could cloud the path to success. Knowing where the value in a deal lies, focusing on how to stop any meltdown of a target business during the transaction, and moving fast to address potential reputational damage can help organizations achieve success.

The new distressed M&A

Distressed asset M&A has been a popular growth path for acquirers in past economic downturns. Economic instability often means acquisitions are possible at significant discounts. Buyers can find deals that were previously too expensive or deals that may not be available in the future—now-or-never opportunities.

Distressed M&A: Finding opportunity and value amid the risks

The early stages of a new cycle of distressed M&A are unfolding.

With the economic turmoil caused by the global pandemic, many industries are under extraordinary strain. Even if the scope or breadth of the distressed opportunities aren’t fully known, smart M&A leaders are preparing. Companies that are emerging from the pandemic in a good position to thrive will be ready to make deals. It’s important to keep a clear focus on the complications and risks presented in transactions involving distressed assets. These deals can be advantageous for both the acquirer and the target, but the role of creditors, courts, and other bidders can create time constraints, restrict information flows, and interfere with due diligence planning.

M&A leaders can minimize risks in executing a distressed transaction by considering three main principles as organizations move forward in the new normal.

Know where the value lies

Successful integration requires a well-defined vision of how an acquisition target will exist within the combined entity. How will this deal create value? What risks can affect value realization? The unique circumstances of distressed assets can further complicate the thinking around value creation. For buyers to ensure a successful integration of the acquired business, they need to have clarity of purpose, stay focused on value drivers, and prepare for the unexpected.

Be mindful of the melting ice cube

The timing of a distressed transaction moves at the speed of the courts. This can be doubly problematic: A compressed transaction timeline can create internal confusion and sow chaos, while an extended timeline can exacerbate a sense of uncertainty. Both can precipitate the loss of customers, suppliers, and employees—a meltdown that can threaten even a well-planned value creation strategy.

Work fast to rebuild reputational damage

The cornerstone of distressed asset transactions lies in keeping the right customers, employees, suppliers, and other stakeholders from defecting. New ownership of distressed assets may remove many issues that have held a business back, but fixing a damaged reputation after bankruptcy is often a major concern.

Wading into the new normal

The distressed M&A cycle that’s beginning presents significant opportunities for healthy companies with the wherewithal to make deals. But it will differ in some ways from the distressed asset activity seen in previous economic downturns. The COVID-19 pandemic creates uncertainties, but it also presents new implications that must be layered on top of the considerations that come with a decision to acquire a troubled asset.

A buyer may need to be asking whether a target business’s supply chain is subject to disruption if the pandemic worsens. Leaders may need to consider whether customer behavior changes that have created a company’s distress situation are likely to be transitory or lasting. Indeed, the pandemic has created a long list of new questions that are going to apply to any M&A transaction, and these are important even when you’re paying a bargain price for an asset.

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