2009 Bankruptcy M&A 20 times higher than in 2007

It has been widely expected that 2009 will be a year of increased distressed M&A activity, and data from January 2009 backs that up.

According to a Thomson Reuters study, there has already been $14 billion of divestitures through bankruptcy in the first month of this year.

Themes this week:

1) 20x Increase in Bankrupt M&A Activity

2) M&A Debate - Keep Doing Deals or Hunker Down?

20x Increase in Bankrupt M&A Activity

9% of January's M&A Activity involved bankrupt companies. This is over 20 times higher than the figure of 0.4% for 2007.

Furthermore, this 9% covers only bankruptcies. New bankruptcy rules and the extreme scarcity of DIP (Debtor in Possession) financing means that most midsized companies cannot afford to go through the bankruptcy process.

This means that the actual number of distressed M&A deals is likely much higher.

Distressed M&A activity could result from:

1. Larger strategic buyers picking up struggling smaller market participants

2. Out-of-court settlements and pre-bankruptcy sales

3. Sale of non-core assets to streamline operations

4. Over-extended companies reducing leverage and realizing cash

5. Mergers of troubled companies

6. Forced sale through bankruptcy

Only no.6 in the list above is covered in the 9% of M&A activity reported by Reuters so far this year.

In the Thomson Reuters' study, there were 210 deals in 2008 that sold or merged operations of bankrupt companies. That is up 55% from the 140 deals in 2007.

According to a Debtwire survey of hedge fund managers and trading desks, distressed asset sales are expected to rise 91% this year.

When a bankruptcy does occur, it may be from a pre-negotiated settlement between secured lenders and stakeholders to sell assets through Section 363 protection.

Many companies that are in trouble and near bankruptcy are scrambling to forge alliances and build relationships with potential buyers in the event that the worst scenario should happen.

Even for healthy companies, it makes sense that business owners should be exploring some form of joint venture or merger to combine efficiencies and ensure their survival through these difficult times.

M&A Debate - Keep Doing Deals or Hunker Down?

Deloitte Consulting LLP had a recent debate in an article: "Boom or Bust: Keep Doing M&A Deals or Hunker Down?" (click to link to article)

Below is a summary of the points and counterpoints of the debate.

Position 1) Don't do any M&A Deals.

Position 2) Keep doing M&A Deals
















Private Equity firms, which account for a reasonable proportion of M&A activity are counting on bolt-on acquisitions to stay active and grow their portfolios. Progressive PE firms are looking to identify companies within their geographies and product lines to expand their reach.

Organic growth may not be available for some time, so they must look to acquisitions. Synergies gained from successful integration will, more than ever, be a key measurement of a successful deal.

As we have stated in our previous articles, deals will be done in 2009 but they will require more creativity in the way they are structured and more stringent due diligence.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.