Distressed M&A—The Rules of the Road

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-05-23

Posted by Ricky Mason, Amy Wolf and Joe Celentino, Wachtell, Lipton, Rosen & Katz, on Thursday, May 23, 2019
Editor's Note: Ricky Mason is partner, Amy Wolf is of counsel, and Joe Celentino is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The topic of the complete publication (available here) is mergers and acquisitions where the target company is “distressed.” Distress for this purpose means that a company is having difficulty dealing with its liabilities—whether in making required payments on borrowed money, obtaining or paying down trade credit, addressing debt covenant breaches, or raising additional debt to address funding needs.

Distressed companies can represent attractive acquisition targets. Their stock and their debt often trade at prices reflecting the difficulties they face, and they may be under pressure to sell assets or securities quickly to raise capital or pay down debt. Accordingly, prospective acquirors may have an opportunity to acquire attractive assets or securities at a favorable price. This outline considers how best to acquire a distressed company from every possible point of entry, whether that consists of buying existing or newly issued stock, merging with the target, buying assets, or buying existing debt in the hope that it converts into ownership.

Some modestly distressed companies require a mere “band-aid” (such as a temporary waiver of a financial maintenance covenant when macroeconomic forces have led to a temporary decline in earnings). Others require “major surgery” (such as where a fundamentally over-levered company must radically reduce debt).