GERMANY | MERGERS & ACQUISITIONS | Company Acquisition in times of Corona
Strengthen your own Position, Exploiting the Opportunities offered by M&A activities
Planning now is the smart thing to do

The corona crisis is currently causing great uncertainty in the market. No one can anticipate how long the crisis will last and how much the global economy will be affected despite unprecedented government support measures. This uncertainty is reflected in the international capital markets: unprecedented price losses are followed by double-digit price gains before sliding back down again. Despite all this uncertainty, it is already clear that after this crisis – as after every crisis – there will be winners and losers and that the crisis will be followed by a phase of consolidation. The first insolvencies, as is currently the case with “Esprit”, “Vapiano” and “Maredo”, have already been registered due to the additional downturn in the market environment caused by the corona crisis. What is also becoming apparent, however, is that cash-strong companies will have access to unexpected M&A opportunities. Two aspects should therefore be kept in mind for every entrepreneur and business Operator:

1. Strengthening of the own position

To be on the winners’ side, the right course must be set now. In order to compensate for the decline in sales, the first step is to reduce as far as possible the costs incurred. There are a variety of options available to do this. In addition to the means available under labour law, such as for instance short-time work, the larger permanent debt relationships in particular are therefore being dissolved or at least renegotiated at the moment. Consideration should also be given to how further state support measures can be used, as the unexpected capital will necessarily lead to distortions in the market. New cooperations can also be a way of strengthening one’s own position.

2. Opportunities through M&A activities

From our perspective, it also seems important to think one step ahead and consider how the crisis can be taken advantage of, possibly by (indirectly) using any subsidies, to take over troubled competitors.
When planning these steps, it must be noted that the procedure and rules for the purchase of an insolvent company differ considerably from regular company transactions. In the following, we have outlined some of the principles governing the acquisition of crisis companies:

2.1 Timing

It may seem tempting to acquire a company in crisis by way of a share deal before insolvency proceedings are opened. But the associated disadvantages are usually so severe that companies in crisis should only be bought by the insolvency administrator or as part of an insolvency plan.
The underlying reason is that there is usually no time for a thorough due diligence. It is, hence, not possible to reliably assess whether the contribution to be planned in addition to the purchase price for the financial and operational restructuring of the distressed company is sufficient to cover the (over) due liabilities and obligations of the acquired legal entity. This problem cannot be solved by an asset deal at this stage either. Although it is possible to select the assets individually in this case, if the seller becomes insolvent after the transaction has been completed, there is a risk that the asset deal will be contested on the grounds of creditor disadvantage, should the assets be sold below market value which may occur in individual cases in emergency sales. In this case, the assets must be surrendered and the purchase price will only be refunded in the amount of the insolvency dividend. Another disadvantage of an asset deal prior to the opening of insolvency proceedings is that in the event of a takeover of a Business operation as a going concern, all obligations to employees are also transferred. In the event of a purchase from the insolvency administrator after the opening of insolvency proceedings, there are exceptions to this rule which are favourable for the purchaser under certain circumstances and allow special structuring options which would not exist outside of insolvency.

2.2 Takeover

If basic rule no. 1 has been respected when taking over an insolvent company, it must be kept in mind that – in addition to the legal part – the main focus of the transaction is on preparation and communication with the parties involved. The key to success here is to bring the creditors on board, in addition to the insolvency administrator, so as to convince them in particular that they would be in a significantly worse position in the context of a liquidation than they would be in the case of the proposed sale. Furthermore, not only the necessary assets have to be identified together with the insolvency administrator but also a reduction of personnel has to be prepared which will be much easier to achieve through the instruments of insolvency law.
As already pointed out, such transactions usually take place in the context of an asset deal. Apart from the identification of the assets, the biggest hindrance here is that the contractual relationships are not transferred without the consent of the respective contractual partners. Yet this consent is not important if the company is acquired as part of a share deal. However, this should only be considered if the debtor company has previously been discharged from debt by an insolvency plan and if it is clearly regulated which payments (apart from the purchase price) the potential acquirer must make to the creditors of the debtor company. This is always an individual case and the subject of negotiations with the creditors. When acquiring the shares (share deal), for instance, the name (the company) of the debtor company can be continued, and existing licences that were only granted to the debtor company can continue to be used without interruption. This can be a decisive advantage in the market.
Preparation and communication also play a crucial role in the preparation of a distressed M&A transaction because the highest bidder does not necessarily win the bid. If the bid exceeds the value of the individual assets (break-up value), other important factors such as transaction security, guaranteed financing and the number of jobs taken over are of central importance. It should moreover be noted that insolvency administrators usually also seek a transaction as a package in the context of an asset deal in order to ensure the continued existence of the company as a whole and thus to achieve the highest possible creditor satisfaction and approval rate among creditors.
For the acquirer itself, it must be taken into account that in the context of a distressed M&A transaction no guarantees are given by the insolvency administrator. The usual regime of guarantees and warranties in a sale and purchase agreement is therefore not applicable and all risks are essentially reflected in the purchase price.

3. Conclusion

However difficult the current situation may be, every crisis also offers opportunities.



Angelika Kapfer
Christian Kalusa
Torsten Cülter

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