United States: Possible silver lining: targeted acquisitions
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Nearly two years into the coronavirus pandemic, as the automotive supply chain continues to be disrupted not only by the pandemic but also by port and logistics delays, shortages of materials such as semiconductors , steel, resin and foam, and rising costs (including labor in particular), there are opportunities for growth through acquisition. Businesses that may have been bolstered by government support at the start of the pandemic (through PPP loans or other government assistance) are beginning to feel increased pressure as they face financial challenges and operational. Lenders that previously offered credit extensions and default forbearance are increasingly active in asserting their rights and remedies in the event of default. The cash and credit issues facing these companies may translate into opportunities to buy them at depressed valuations. While these deals may seem difficult to come by, savvy investors will be well served by considering both out of court and bankruptcyacquisitions of distressed businesses that are under pressure due to the current environment.
Checklist of some key considerations for an amicable acquisition
- Often structured like a normal asset transaction.
- Due diligence is even more critical to understand in order to creatively avoid and manage potential liabilities.
- Specify the liabilities assumed and the liabilities excluded.
- Include indemnification and escrow where possible (but seller may not be able to act under indemnification).
- Negotiations with creditor constituencies can reduce exposure.
– Quickly; no court approval required.
– Cannot “choose contracts” as easily as in bankruptcy.
Checklist of Some Key Considerations for Bankruptcy Sale
- Buyers often seek to avoid potential successor liability and other risks, and require the sale to occur in a Chapter 11 to maximize buyer protections/rights.
- Section 363 of the Bankruptcy Code permits a debtor to sell substantially all of its assets if supported by reasonable business judgment, free and clear of all liens, claims and encumbrances.
- Section 365 of the Bankruptcy Code permits a debtor to assume and assign, or reject, certain unexpired contracts and leases notwithstanding the assignment restrictions in those contracts.
- Upon a bankruptcy filing, the “automatic stay” occurs and protects the seller’s assets from creditor collection efforts and contract terminations to allow a transaction to occur.
– The court-approved sale is “free and clear” of liabilities and the balance sheet is clean.
– The sale will be made at “the highest and best bid”; a bidding is usually required and, notwithstanding the advantages of the trail horse, the marketing process may result in another winning bidder.
The auto industry has faced incredible headwinds, many of which persist well into 2022. As companies seek to grow revenues and profits, these headwinds may well present opportunities for growth through acquisitions. .
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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