Mergers & Acquisitions / Corporate Law10.12.2020 Newsletter

18th German Corporate M&A-Congress

Oppenhoff Panel: "Distressed investments - bargain or bad buy" - a brief summary

At this year's 18th German Corporate M&A-Congress, our experts Myriam Baars-Schilling and Dr. Markus Rasner joined our distinguished guests Matthias Lüttges, Head of M&A and Transaction Solutions at Aon Germany, and Martin Lambrecht, attorney and insolvency administrator at LAMBRECHT, in a panel on the topic of "Distressed Investments - Bargain or Bad Buy".

Our panelists agreed that the Corona crisis will lead to a rapid and permanent increase in the number of insolvencies in a wide range of economic sectors. What this means for the distressed M&A market, the do's and don'ts when purchasing in the crisis and new developments in transaction processes was addressed in an interesting and lively virtual discussion on November 11, 2020.

1. Impact of the corona crisis

In the last seven to eight years, the M&A market has seen hardly any transactions involving distressed targets. After the suspension of the insolvency filing requirement endedon December 31, 2020, a steady increase in the number of insolvency proceedings, especially in the sectors that were already weakening before the Corona crisis, and thus a flood of insolvencies rather than a wave, is expected. Strategic investors intending to invest will therefore have to prepare themselves mentally and strategically for participation in distressed M&A processes in the coming years, especially in the area of medium-sized companies (sales volumes approx. EUR 50 - 500 million). Until now, strategists have often been very reluctant to invest in distressed companies for various reasons. However, the insolvency plan procedure and, in particular, the new pre-insolvency restructuring procedure could change this decisively in the future.

2. Do's and Don'ts

From an insolvency administrator's point of view, a correct and professional positioning of a prospective buyer is vital for  the process. Due diligence request lists without any consideration of the specifics of a distressed M&A deal, as well as the use of inexperienced teams on the buyer's side, can lead to a prospective buyer quickly ending up on the sidelines. Distressed M&A deals are characterized by a tight schedule, not least due to the time limit of the insolvency funding. Investors therefore need to be agile and able to make decisions. Once the process is underway, there is no room for weeks of committee reservations. As far as securing the buyer through warranties and indemnities is concerned, insolvency administrators will in many cases still not be prepared to grant these in any way. However, some insolvency administrators may be more amenable in this respect against the background of their intensive involvement with the company and its business and with a view to a possibly higher purchase price to be achieved.

3. W&I Insurance in Distressed M&A

The lack of protection for the buyer through guarantees and indemnities in distressed M&A transactions could be increasingly compensated by W&I insurance in the future. In addition to traditional W&I insurance, so-called "synthetic" warranty catalogues could come into play here, according to which warranties are not agreed in the purchase agreement, but exclusively between the policyholder and the insurance company in the policy. Due to the special circumstances, the insurance premiums are above what is known from "normal" transactions, currently between 1.8-2.5% of the coverage amount. However, cooperation of the insolvency administrator is necessary in these cases, too. Especially for the due diligence and preparation of the disclosure schedules, the insolvency administrator’s assistance is indispensable. The insolvency administrator however also benefits from astimulation of the bidding competition, using a (synthetic) insurance solution, as he can expect higher purchase price offers.

Please click here to access a recording of the complete panel.

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Myriam Baars-Schilling

Myriam Baars-Schilling

PartnerAttorney

Konrad-Adenauer-Ufer 23
50668 Cologne
T +49 221 2091 210
M +49 172 3460 632

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Dr. Markus Rasner

Dr. Markus Rasner

PartnerAttorney

Bockenheimer Landstraße 2-4
60306 Frankfurt am Main
T +49 69 707968 148
M +49 172 6783 728

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