Opportunities for CFOs to lead the acquisition of bankrupt companies is expected to surge later this year as rising interest rates, inflation and supply chain problems accelerate economic distress, bankruptcy specialists say.
“The opportunities of bankruptcy strategic acquisitions are incredible,” said Thomas Salerno, a 40-year bankruptcy and restructuring attorney and former board member of the American Bankruptcy Institute, the nation’s largest association of bankruptcy professionals.
Bankruptcies in the United States are expected to reach 13,550 companies by the end of the first quarter and 21,000 companies by 2023, according to Trading Economics.
Whether the acquisition is seen as a pure financial play or the chance for a vertical or horizontal integration, there are advantages to buying a company once it’s going through bankruptcy, Salerno said. Among other things, the assets will be free and clear of liens.
The court’s sale order will act as a type of insurance that the buyer has good title to the assets without concerns creditors will subsequently assert claims — whether for successor or product liability or unpaid debts — against the buyer, he said.
Still, there’s a potential downside, too. If the sale is through an auction, that could raise the price of the distressed target, Salerno said.
For CFOs interested in assigning someone to scope out targets, the Daily Bankruptcy Review is a starting point for identifying business bankruptcies.
When targets are identified, the bankruptcy filings with judges in first-day declarations can provide suitors with financial and operational information that normally isn’t available. That’s particularly the case for accessing detailed balance sheets and profit and loss statements of private firms.
Salerno said something to watch out for in an acquisition is if the target has secured debt. The only way to obtain the assets is to get consensual lien releases from all lienholders — both senior and junior, if the purchase price is insufficient to pay the secured debt in full.
Both the acquiring and the acquired company can get a shot in the arm from a bankruptcy deal if it leads to a business turnaround, said Zev Shechtman, a business bankruptcy and restructuring attorney who has served as a judicial extern to the U.S. Bankruptcy Court.
In one bankruptcy acquisition, a group of experienced social entrepreneurs founded a company that went on to purchase the going-concern assets of an Alaskan regional airline through bankruptcy.
“They breathed life back into the company, hired back hundreds of employees, and resumed essential services to far rural reaches of the vast state,” said Shechtman. “Further, they have used that asset acquisition as a platform to start a new international airline and the first crypto-based travel awards program,”
Need for speed
To be most effective to acquire assets from a company in bankruptcy, Shechtman said, the buyer will need to be prepared for a fast moving, potentially complicated process.
“The bankruptcy process is in court and involves a distressed company that is getting pressure from multiple constituents,” he said. “Accordingly, there can be tight deadlines that lack the flexibility that might exist in ordinary transactions. There can also be moving targets that are dictated by the parties who are, simultaneously with the transaction, litigating in the bankruptcy case.”
What’s more, the due diligence might not be as robust and accessible as would be the norm outside of bankruptcy and the rules and procedures can be technical.
“A buyer should go into this kind of transaction with eyes wide open,” he said.