Distressed M&A

This applies in particular to companies from those European regions that did not manage to participate to an adequate degree in the economic upturn as well as those companies that reflected an excessive orientation towards critical markets like Russia / Ukraine, for instance. As a rule, the extent of the probabilites of success (or failure) in assuming a distressed asset is far greater compared with a typical M&A transaction. Purchasers could benefit enormously as a banking consortium is prepared, in a “no-owner” scenario, to sell its shares only at a low premium. This means that the relevant purchaser can acquire a debt-free enterprise with good opportunities for value growth.

On the other hand, if the company should not have undergone a complete restructuring, the purchaser can also be in for a major loss scenario. If this was overlooked during the due diligence phase, the price ultimately paid for the company would be far higher. The liquidity trap often emerges later when substantial funding is required to return the company into positive earnings territory.

A valuation is also much more complicated from the perspective of the purchaser since typically no earnings are generated, no equity or a very low level of equity is available and the relevant M&A multiples are out of action. For this reason, the focus in the due diligence phase is shifted to sales trends, competitiveness, stability of the restructuring plan and other factors that are much more difficult to evaluate. A further challenge for the company proceeding with a takeover is the management of the company acquired, a company that has not yet passed through a full operational restructuring programme and lacks adequate management capacity and skills.There is no simple solution to the problems specified. Yet the key to success lies in a clear identification of all problem areas in the due diligence phase and a speedy implementation of restructuring measures immediately after the transaction.

“Due Diligence Support”. This extract from our publication illustrates the quality and depth of mergers & acquisitions as part of project work.