MorrisAnderson

Chad Striker, Greenberg Traurig
Alpesh Amin, MorrisAnderson

As with any transaction or negotiation, achieving a successful outcome not only depends upon defining and focusing on your own objectives, but also, and perhaps more importantly, understanding the objectives of your counterparty.   The distressed deal, and particularly the 363 bankruptcy sale, is no exception.  To most effectively participate as a prospective buyer of a business in a 363 bankruptcy sale process, it is critical to understand two of the most important objectives that the debtor (and the other stakeholders) are trying to achieve – (1) certainty of closing a transaction and (2) maximizing recovery for the estate.  Prospective buyers should not lose sight of these two fundamental objectives.  While the approaches discussed below can give prospective buyers an advantage, these approaches may not be a “fit” for all prospective buyers, particularly those with a high degree of confidence that their proposed purchase price exceeds (or will exceed through the auction process) all others by a significant margin.  With that said, those who have the flexibility, discipline and perhaps, risk tolerance, can reap significant rewards in the bankruptcy sale process by taking note of, and employing, a few simple concepts.

Tread Lightly to Assure Certainty of Closing
From a practical perspective, a prospective buyer of a business in a 363 bankruptcy sale, whether attempting to be selected as a stalking-horse bidder or participating in an auction process, can often be best served, and can demonstrate its commitment to closing a transaction, by exercising restraint in its approach to the transaction documents and transaction terms.   When presented with the debtor’s form of purchase agreement (or the purchase agreement negotiated with a stalking-horse bidder), a prospective buyer should tread lightly.  Nothing says, “I’m going to be difficult to negotiate with – and we might never get a deal done”, like a heavily marked-up purchase agreement. 

A prospective buyer seeking an edge in the process should approach the purchase agreement and its mark-up with surgical precision – and not attempt to re-write the document.  Because every edit creates a potential issue and potential uncertainty for the debtor and the other stakeholders, a real advantage can be secured if a bidder can focus only on what is important, use as little red ink as possible, work with the document that has been presented, and not re-write or replace provisions in their entirety unless they are beyond repair.  For example, consider a form of purchase agreement that contains a working capital adjustment provision.  The working capital language in the document will have already been reviewed and approved by many constituents, including the debtor’s board of directors, the secured lender(s), the unsecured creditors’ committee and each of their counsel.  While a prospective buyer might prefer or be more comfortable with its own working capital adjustment language, proposing an entirely new provision will not only add uncertainty in terms of creating additional issues, it may very well add uncertainty in terms of having to obtain approval of the new working capital adjustment mechanism from all of the various constituents.  Not only can working with the debtor’s form of purchase agreement help a bidder, materially changing the form in a “lawyer’s battle” can be a real disadvantage to a bidder.

The closing conditions in a purchase agreement, and specifically the conditions to a buyer’s obligation to close, obviously deal directly with certainty of close.  A prospective buyer should be careful in requesting additional closing conditions -- and at very least, not propose due diligence or financing outs.  If a buyer does not need certain closing conditions proposed by the debtor, a buyer can bolster the certainty of close, and its bid, by eliminating those unnecessary closing conditions.

While it should go without saying, it is equally crucial that a prospective buyer not include or request provisions or terms that are atypical or simply not appropriate in the bankruptcy context.  For example, while it may be nice to have a full set of representations and warranties that survive closing, along with post-closing indemnification for any breaches of those representations and warranties, those terms would be atypical in the bankruptcy sale context.  Rather than attempting to negotiate representations, warranties and post-closing buyer protections, a prospective buyer should be prepared to rely on its due diligence, along with the liability cleansing effects of a 363 sale transaction.

In the end, a prospective buyer’s concerted effort to “tread lightly” will translate into a transaction document, and a deal, that will be viewed by the debtor (and the other constituents) as a deal that can get closed.  While it is much more difficult to exercise restraint in the mark-up of a purchase agreement, the failure to do so may very well prevent a prospective buyer from being able to participate (or participate effectively) in a bankruptcy sale process.

Put Your Best Foot Forward to Enhance Bid Value
Certainty of closing is not the only concern for the debtor and the other stakeholders – obviously, the chief objective is to maximize value of the recovery for the estate.  While the basic underlying purchase price is of considerable importance, there are other elements of a bid that prospective buyers can and should consider, at all phases of the transaction, to enhance bid value without necessarily increasing the underlying purchase price.

Prospective buyers often include purchase price holdbacks or escrows to secure the payment of certain post-closing debtor obligations, such as purchase price adjustments.  In valuing a prospective buyer’s bid, the debtor may simply assume that the estate will never receive the holdback or escrow dollars.  As such, where possible, bidders who eliminate holdbacks and escrows in a bid can significantly enhance the value of the bid.

If the circumstances warrant, a prospective purchaser might consider eliminating purchase price adjustment mechanisms, even if the debtor has proposed the mechanism.  For example, a debtor may have proposed a working capital adjustment in a purchase agreement because it anticipated that prospective buyers would ultimately insist on such a provision.  If a prospective buyer can get comfortable with its valuation and the working capital position of the business, the buyer may be able to add value to its bid (by adding certainty to the purchase price and eliminating the possibility of a downward purchase price adjustment) by removing the working capital adjustment.

In addition to matters that can have a direct monetary impact, prospective buyers must not overlook intangibles that can also enhance bid value.  The treatment of certain non-monetary items can have significant impact on the ultimate value attributed to a bid.  For example, in today’s economy in which jobs are considered sacred, a prospective buyer’s agreement to continue the employment of debtor’s employees following closing can be a significant factor in enhancing the overall appeal (and perhaps even value) of the bid.   A prospective buyer can also add value to its bid by simply excluding certain assets that may benefit or bring recovery to the estate, such as certain types of litigation claims.  Moreover, in the context of a distressed company, in which every passing day can mean additional cash burn and exposure for the lenders and present additional risk and liability to the debtor (and the other stakeholders), elimination of closing conditions and more importantly, acceleration of the timing of closing, can add substantial value to a bid in terms of loss and risk mitigation.  In addition, vendors will obviously be interested in the outcome of the sale process and may dominate the creditors’ committee.  To ensure vendor support for the bid and to enhance value, a bidder may include assurances of continued future business or specific payments to critical vendors.  These assurances may be of substantial value to the vendors, which may be dependent on the business and often see no or minimal recovery in bankruptcy.

Ultimately, each situation will have its own special factors that may create value independent of the underlying purchase price – and a prospective buyer must not overlook these factors, which, in the end of the day, may win the deal.

Restructuring Advisor’s Perspective
All too often, it seems that prospective buyers in the bankruptcy process waste time and money on financial analysis and due diligence that have little relevance in the bankruptcy sale context.  For example, historical financial and operational results of a company in bankruptcy often may mean very little in terms of the future of the business and ultimately, the prospective buyer’s investment thesis -- yet the buyer will spend countless hours analyzing the historical data.  A prospective buyer in the bankruptcy context needs to adjust its expectations, its diligence process and its risk tolerance, from levels that might otherwise be appropriate in a traditional (non-distressed) acquisition opportunity.  Given the constraints of a bankruptcy sale, particularly the time constraints inherent in the process and the often limited resources of the debtor, a prospective buyer must focus on its investment rationale and objectives, and adjust its analysis and due diligence accordingly.  Ultimately, this is once again a function of treading lightly and putting your best foot forward.

Take Away
Prospective buyers in a 363 bankruptcy sale process must be mindful of the primary objectives of the debtor and the other stakeholders.  And those prospective buyers who can help achieve those objectives -- by assuring certainty of close and maximizing bid value -- will be effective, and hopefully successful, participants in the transaction process.

The authors would like to thank the following individuals for their contributions to this article: Keith Shapiro, Co-Chair of the Business Reorganization and Financial Restructuring Practice and Co-Managing Shareholder of the Chicago office of Greenberg Traurig, LLP; Nancy Peterman, Chair of the Business Reorganization and Financial Restructuring Practice of the Chicago office of Greenberg Traurig, LLP; and Peter Lieberman, Co-Chair of the Corporate and Securities Practice of the Chicago office of Greenberg Traurig, LLP.

Chad Striker is a shareholder at Greenberg Traurig. He represents private equity funds and public and private companies in mergers and acquisitions, financings, fund formation, and general corporate matters. Chad earned his law degree from the University of Michigan Law School in 1997 and his undergraduate degree from the University of Michigan Business School in 1993. He can be reached at strikerc@gtlaw.com.

Alpesh Amin is a director at MorrisAnderson. He has over ten years of experience in the areas of corporate finance, restructuring and banking and has served in an advisory capacity both for company management and creditors. His background includes company turnarounds and restructurings, Chapter 11 bankruptcy proceedings, asset sales and liquidations, business plan development and analysis, debt restructurings, cash flow management and forecasting, and due diligence assignments. Prior to joining MorrisAnderson, Alpesh held consulting positions with Huron Consulting Group’s Corporate Advisory Services office, where he focused on restructuring and turnaround engagements, and with Bridge Associates, LLC, where he specialized in turnaround services and interim and wind-down management services. Alpesh is a member of the Turnaround Management Association (TMA) and the American Bankruptcy Institute (ABI). He holds a Bachelor’s degree in Business Administration, with concentrations in Finance and Management Information Systems, from Miami University. He can be reached at aamin@morrisanderson.com.