Part 1 of a Series
In line with many other jurisdictions, the Austrian M&A market has suffered from the COVID-19 crisis both in terms of volume and number of deals. In the months to come, we expect an uptick in distressed M&A. Such distressed M&A transactions may offer opportunities for buyers as well as for sellers, if they are prepared and know how to act swiftly.
In particular, experienced investors and crisis-proof strategic buyers with cash-reserves or an intact stock price are using high profile collapses and are eager to purchase distressed targets at favourable valuations. Furthermore, the sale of non-core business reduces costs and simultaneously increases much-needed liquidity in times of crisis.
Due to Covid-19, the duty to file in Austria for insolvency resulting from over-indebtedness is suspended until 30 June 2020 if the over-indebtedness occurred after 1 March 2020. This means that the number of distressed M&A transactions may further increase after 30 June 2020.
Part 2 of this series available here on takeovers of publicly listed companies
Structuring is key
Distressed M&A encompasses all transactions before or during the insolvency of a company in crisis. Such a crisis has two fundamental periods, 1) when reorganisation is needed, and 2) material insolvency.
According to Austrian standards, a company is in crisis when it is:
(a) illiquid (i.e., the inability to pay all debts when they fall due);
(b) over-indebted (i.e. the status of the assets of the company in a liquidation scenario and its future forecast on its continued existence are both negative); and
(c) facing the need for reorganization (i.e. the company's equity capital is below 8% and the term for the debt repayment exceeds fifteen years).
In distressed situations, the careful structuring of the envisaged transaction is essential in order to cover the risks and increase deal security. In particular, it needs to be determined whether the acquisition of the distressed assets before the insolvency or the acquisition from insolvency is in favour of the relevant party. To the extent insolvency proceedings have not yet been opened, the buyer may have restructuring privileges. For example, loans granted in the course of the acquisition of a stake in a company in crisis for the purpose of overcoming the crisis within the framework of a reorganization concept may not be equity replacing.
Furthermore, it needs to be evaluated to what extent an asset deal or share deal in a distressed scenario makes sense. Generally, a buyer of assets in a distressed M&A transaction will be quite interested in avoiding taking over any liabilities associated with the company it purchases, and this is one of the main advantageous of an asset deal over a share deal.
Balancing interests translates into results
Depending on how a crisis develops in a particular company, the number of relevant stakeholders in distressed M&A transactions may be higher than in other M&A transactions which are commonly negotiated between the seller and the buyer. Distressed M&A is characterized by the need to find a resolution among the different interests represented by shareholders, creditors (banks), management, suppliers, customers and employees. Therefore, the success of a distressed M&A transaction depends to a large extent on the roles and actions of the relevant parties and how these impact one another.
Time constraints must be effectively managed
Generally, companies in crisis must be sold under extremely tight time constraints. Transaction documents are sometimes negotiated overnight, and due diligence is limited to weeks or even days instead of what otherwise would have been months. Despite such tight time constraints, it is of critical importance to assess the risks and focus on and negotiate the relevant issues in line with market standards applicable to distressed M&A transactions.
To illustrate: the insolvency administrator is commonly not willing to agree on extensive representations and warranties except for ownership and non-encumbrance of the assets sold, which applies to the pre-packaged deals as well as to the ordinary sales process in the course of insolvency proceedings. Therefore, it is easier to handle time constraints and ensure deal security if all involved parties have the same understanding of such market standards.
In a distressed scenario, time is short. The more prepared the buyer is, the quicker it can act and secure a successful deal.