Mergers and Acquisitions Basics by Michael E. S. Frankel & Larry Forman

Author:Michael E. S. Frankel & Larry Forman
Language: eng
Format: epub
ISBN: 9781119274254
Publisher: Wiley
Published: 2017-04-17T13:46:40+00:00

BANKRUPTCY AUCTION

In very simple terms, US bankruptcy law provides that a company that files for bankruptcy can either be reorganized or sold.1 When a company is sold out of bankruptcy, new and interesting issues arise. The bankruptcy auction process is usually far more formal, structured, and time‐consuming than the transaction auction process described above in a “nonbankruptcy” situation. In simplest terms, the Bankruptcy Court will appoint a trustee, who will then conduct an auction. Again, in simple terms, the goal of the trustee is not only to maximize the money recovered through the auction—which will be used to pay out creditors and, if anything is left, equity holders—but also to consider such issues as the continuation of the business and the effect of the bankruptcy on employees, customers, and other related parties. Once the trustee has conducted the auction and determined a winning bidder, the terms of the sale will have to be submitted for approval to the bankruptcy court. Creditors and other related parties will have an opportunity to object to the transaction, and the bankruptcy judge will have to make a final ruling, approving or disapproving the transaction. While a traditional formal auction may lock a Buyer into a binding bid, with little room to maneuver after the bid is accepted, the situation is even more extreme in a bankruptcy proceeding. In most cases, the bidder in a bankruptcy auction will have submitted a complete and final purchase agreement with all terms filled in. Once the bankruptcy judge has accepted the agreement, there is usually no room to make any changes.

The bankruptcy auction process usually takes months and requires far more resources and effort. It also subjects the Buyer to a lot more publicity, since the process is usually quite public. Finally, it subjects the Buyer to the judgment of the Bankruptcy Court, which is in effect yet another counterparty, beyond the trustee. Offsetting all these issues is the value usually found in a bankruptcy proceeding, because companies in bankruptcy are usually “fixer uppers.” Acquisitions out of a bankruptcy auction may often be at a deep discount, so Buyers participating in the auction may have the opportunity to acquire the assets very cheaply.

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