What Are Distressed Mergers and Acquisitions?

Distressed mergers and acquisitions (M&A) form a distinct category of corporate transactions, characterised by speed, risk and financial pressures. These deals typically involve businesses in financial distress and are often driven by the urgent need to secure investment, realise value, or preserve operations. In many cases, they offer a last opportunity to restructure or rescue a business before formal insolvency proceedings begin.

Whether you are a buyer seeking to deploy capital, a seller managing creditor expectations, or an insolvency specialist coordinating a sale process, understanding distressed M&A is essential to making the most of these time-sensitive situations. In this guide, JMW's restructuring and insolvency team sets out how distressed mergers differ from conventional corporate acquisitions, the risks and challenges involved, and how both buyers and sellers can prepare.

What Are Distressed Mergers and Acquisitions, and When Are They Required?

Distressed mergers and acquisitions are transactions involving a company in financial difficulties, where the business is either unable to meet its current liabilities or is projected to face insolvency without external intervention. These distressed transactions typically occur under time pressure and may involve a share sale, an asset deal, or a hybrid structure, depending on the circumstances and the desired outcome.

Distressed M&A become a relevant option when a company’s financial position deteriorates to the point where its directors, lenders or stakeholders must act quickly to protect value. This could be during early-stage discussions around refinancing or cost restructuring, or later in a formal insolvency process where an insolvency practitioner oversees the sale. In either scenario, the sale process is often condensed, with limited opportunity for a drawn-out process or detailed negotiation.

The decision to pursue a distressed sale process may arise from creditor pressure, falling revenue, increasing pension obligations, or issues with key contracts. In some cases, secured creditors may push for the sale of specific assets to recover value, while in others, the management team or external advisors may seek to preserve the business as a going concern by transferring ownership. Credit bidding - where secured lenders use debt to bid for assets - is common in this space, particularly under the bankruptcy code in cross-border contexts.

These transactions are typically driven by urgency. The parties involved - including legal counsel, financial sponsors and insolvency specialists - must act swiftly, often within a narrow window before value further deteriorates. Buyers may be strategic acquirers, private equity funds, or credit bidders seeking opportunities to acquire assets at a reduced purchase price while navigating the risks of unknown liabilities or incomplete information.

How Do Distressed M&A Deals Differ from Conventional Mergers and Acquisitions?

Distressed mergers and acquisitions differ significantly from conventional corporate acquisitions, primarily due to their accelerated timetable, the company's financial situation, and the unique pressures of a distressed sale process. Here are the key differences:

• Accelerated timetable: Conventional mergers and acquisitions allow extensive negotiation and thorough diligence. Distressed transactions must typically close within days or weeks, limiting the depth of the due diligence process.
• Reduced due diligence: Buyers have less time and access to information, increasing the risk of unknown liabilities or potential issues emerging post-acquisition.
• Transaction structure: Distressed deals often favour asset sales to help buyers avoid inheriting the full liabilities of the distressed business. Share sales, while possible, are less frequent due to liability risks.
• Contractual protections: In distressed transactions, buyers typically receive fewer warranties and indemnities compared to conventional deals, as sellers often have limited ability or incentive to provide protections.
• Stakeholder involvement: Parties involved in distressed M&A often include insolvency practitioners, bankruptcy courts, secured creditors and credit bidders, whose influence shapes the terms and pace of the transaction.
• Purchase price considerations: Distressed deals often prioritise speed and certainty of completion over achieving the maximum sale price, although secured creditors typically aim to maximise recovery within tight constraints.
• Control and management involvement: The company's management team may have less influence in distressed transactions, with insolvency specialists or creditors often driving the deal process.
• Risk and uncertainty: Distressed deals carry heightened operational, reputational and financial risks due to potential issues such as lost contracts, key employees departing, unresolved litigation and pension obligations.

Understanding these differences is fundamental for buyers and sellers preparing for distressed mergers and acquisitions. Adapting to the unique challenges presented by financial distress can help stakeholders achieve better outcomes.

How Should Buyers Prepare for a Distressed M&A Deal?

Buyers approaching distressed mergers and acquisitions must adapt their strategies to manage increased risks and capitalise effectively on potential opportunities. Successful preparation involves proactively addressing the unique dynamics of distressed transactions, given the accelerated timetable and limited contractual protections.

Buyers should consider the following steps carefully:

• Prioritise focused due diligence: Given the limited timeframe, buyers should conduct targeted due diligence, concentrating specifically on potential liabilities, key contracts, pension obligations, regulatory issues, and asset condition. Rapidly identifying critical risks will be instrumental in avoiding unforeseen complications post-acquisition.
• Engage specialist legal counsel: Speaking to a solicitor with proven expertise in distressed transactions and insolvency proceedings is essential. Specialists can guide buyers through the complex nature of insolvency law, asset deals, and interactions with secured creditors and insolvency practitioners.
• Plan efficient transaction structures: Structuring the transaction effectively - typically via an asset deal, rather than a share sale - will help to minimise liabilities. Buyers must carefully analyse which specific assets they intend to acquire and identify the liabilities or contractual obligations they wish to avoid.
• Understand the seller’s financial position: A comprehensive review of the distressed target’s current financial situation, including creditor positions and ongoing insolvency processes, will help the buyer to negotiate from an informed perspective and accurately estimate a fair purchase price.
• Secure appropriate financing: Financing arrangements need to be firmly in place and flexible enough to accommodate accelerated timetables and sudden developments. At the same time, financial sponsors or private equity backers involved in distressed acquisitions should be prepared to deploy capital swiftly.
• Prepare for rapid decision-making: With multiple bidders potentially involved, quick and decisive action is going to be essential. Buyers need streamlined internal approval processes and clear control provisions to make decisive choices and swiftly commit when necessary.
• Anticipate operational integration issues: Buyers must plan post-acquisition integration strategies carefully, considering key employees, customer retention and asset stabilisation. Proactive communication with stakeholders will make the post-deal integration process much easier.

By thoroughly preparing for these critical aspects, buyers will be able to navigate the potential risks and maximise value from distressed mergers and acquisitions.

How Should Sellers Prepare for a Distressed M&A Deal?

From the seller's perspective, decisive action and effective preparation are equally important, and will help to deliver a successful sale process, safeguard value, and manage the expectations of secured creditors and other stakeholders.

To enhance the prospects of a positive outcome, distressed companies should:

• Act quickly and decisively: Sellers must accept the urgency of their company's financial situation and initiate restructuring negotiations or a distressed sale process promptly. Delays reduce value, risk creditor intervention, and limit the seller’s control over transaction outcomes.
• Appoint insolvency specialists promptly: Early involvement of experienced insolvency practitioners or specialist legal counsel will help the seller to properly manage fiduciary duties, creditor negotiations, and regulatory obligations.
• Prepare accurate and transparent information: Buyers will need clear documentation detailing the company's financial position, specific assets available, potential liabilities, key contracts, pension obligations and regulatory compliance. Transparent, accurate disclosures will reduce delays and increase the buyer's confidence in the process.
• Focus on asset preservation: Maintaining operational stability and preserving critical assets are essential for achieving the maximum sale price. The focus should be on keeping key employees with the business, safeguarding valued contracts and minimising any potential reputational damage during the proceedings.
• Manage stakeholder communications effectively: Clear communication with secured creditors, employees, management teams, and other stakeholders will help to maintain trust and cooperation, even in the face of an accelerated sale timetable.
• Commit to a realistic deal structure: Sellers should clearly understand their preferred transaction structures (asset sale versus share sale) and what these imply for creditors and future liabilities. Early clarity on this facilitates quicker decisions from potential buyers.
• Prepare for competitive bidding processes: Encouraging early-stage discussions with multiple bidders, including financial sponsors and credit bidders, can increase the chances of securing better terms and improved recovery for creditors.

By adopting this direct approach to preparation, sellers position themselves effectively to maximise value from distressed assets, minimise potential disruption, and deliver an outcome that provides a sustainable solution to their financial difficulties.