Nearly two years after the onset of 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 in materials such as semiconductors, steel, resin and foam, and rising costs (including labor especially), there exist opportunities for growth through acquisition. Companies that were perhaps propped up with government support early on during the pandemic (through PPP loans or other government aid) are beginning to feel increased pressure as they face financial and operational challenges. Lenders who previously provided extensions of credit and forbearance of defaults are becoming increasingly active in asserting their rights and remedies in the case of a default. The cash flow and credit issues these companies face may result in opportunities to purchase them at depressed valuations. While these deals may appear to be hard to come by, shrewd investors will be well served by considering both out-of-court and bankruptcy acquisitions of the distressed companies that are under pressure due to the current environment.
Checklist of Certain Key Considerations for an Out-of-Court Acquisition
- Often structured like a normal asset deal.
- Due diligence is even more critical to understand in order to avoid and creatively address potential liabilities.
- Specify assumed liabilities and excluded liabilities.
- Include indemnification and escrow where possible (but seller might not be able to perform under indemnification).
- Negotiations with creditor constituencies can reduce exposure.
PROS | |
- Fast; no court approvals required. |
CONS | |
- Cannot “cherry pick” contracts as easily as in
bankruptcy. |
Checklist of Certain Key Considerations for Bankruptcy Sale
- Buyers often seek to avoid possible 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 contracts and unexpired leases notwithstanding restrictions on assignment in such contracts.
- Upon a bankruptcy filing, the “automatic stay” arises and protects the seller's assets from creditor collection efforts and contract terminations to enable a transaction to occur.
PROS | |
- Court-approved sale is “free and clear” of
liabilities, and balance sheet is clean. |
CONS | |
- Sale will be to the “highest and best bid;” an
auction is generally required and, notwithstanding stalking horse
advantages, marketing process may yield an alternative winning
bidder. |
The automotive industry has faced incredible headwinds, many of which persist into 2022. As companies look to grow their revenue and profits, these headwinds may well present opportunities for growth through acquisition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.