17/07/2024
Uk distressed m&a market challenges
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Navigating Market Challenges in Distressed M&A in the UK

Can UK businesses and investors pivot under the growing burden of distressed M&A deals? Expectations are high for more deals in 2023. This is due to ongoing economic issues and changing world events.

The number of distressed M&A deals in the UK is expected to soar. Companies facing big debts and other troubles need to sell quickly. They hope to lessen their losses. This means that buyers must act fast and be ready to finance their deals.

Deals in distress lack complete details and legal protections. Buyers have to be very careful when they don’t have all the facts. Choosing what to buy and what to pass on needs a clear understanding. This is so they don’t face problems later.

Using Warranty and Indemnity insurance can help reduce risks for buyers. But, it might cost more. Also, making deals with payments that come later or depend on certain outcomes is key. This is because it’s hard to put an exact price on risky businesses.

In this market, knowing a lot and seeing ahead are vital. Both buyers and sellers need to be quick and flexible. They must deal with the changes well to succeed in the UK’s distressed M&A scene.

Introduction to Distressed M&A in the UK

In the UK, a flurry of distressed M&A is expected. This is due to intense economic challenges and operational difficulties. Such deals happen quickly and come with unique strategic hurdles. Buyers need to decide fast, even with limited time for research and few protections.

British businesses face many problems like shortages and high costs. The current economic situation makes consumer-focused companies especially at risk. Company directors must carefully weigh risks, knowing their personal and legal stakes in such deals.

When facing insolvency or restructuring, seeking expert advice is crucial. For sellers, moving quickly to avoid insolvency is key to keeping value. Buyers should prepare for a faster-than-usual investigation before buying distressed businesses.

Many are expecting a growth in distressed M&A in 2023. Deals will need quick, informed decisions despite limited protection. The capability to respond promptly boosts the appeal of buyers.

In distressed situations, selling assets is often preferred. This can help maintain value and cut risks. But, buyers need to make sure the deal complies with the law. Those selling must get advice to handle financial and valuation complexities.

The UK is seeing more business failures than before because of recent events. These trends add to the challenges of the distressed M&A landscape. Here, buying or selling requires careful strategy.

Economic Challenges Impacting Distressed M&A

The UK is facing tough economic times. Inflation is at its highest in ten years, and interest rates are climbing. These challenges have made it hard for companies. The number of businesses going bust has hit levels not seen since 2009.

This tough situation is changing how businesses buy and sell. Now, more careful thinking is needed for deals. This is because the economic issues are forcing both buyers and sellers to be smarter about how they set prices and organise deals.

The amount of distressed M&A deals has gone up. But, these deals are quick and complex. They often need to be finished in just a few days. This shows why a fast but detailed look at a company’s important parts is crucial for buyers.

Given these tough times, valuing a company has become more tricky. It’s important to look closely at the effect of high inflation and interest rates. Methods like CVAs are now being used more to help struggling companies. Their use has jumped 14% between 2022 and 2023.

There are also laws that help separate different types of financial troubles businesses might face. For instance, companies might have money issues but still be able to pay their debts. Bankruptcy processes and plans are there to help manage these turbulent financial times.

Logistical and Operational Challenges in Distressed M&A

In 2023, buying a company that’s in trouble faces big hurdles. These include problems with getting supplies and finding enough workers. Such issues are major and must be thought about carefully before buying.

Companies in trouble need quick action when being bought. If a buyer can act fast and sort out problems swiftly, they stand out. But, in fields where supply chains are messed up, fixing things is harder.

When checking out a company to buy, information might be hard to find. Buyers have to look at key areas closely. This means understanding the problems with getting supplies and with not having enough workers. These are big issues now.

Buying good parts from a company in trouble and avoiding its debts is a common strategy. It changes how tax and money rules affect the deal. Also, making sure who’s responsible for problems is tricky. This is because the selling company might not promise much.

Buyers and sellers often disagree over how much a company is worth. Both sides worry about the risks if the deal goes bad. If the deal is later seen as too cheap, it might be cancelled. This could mean trouble for the people who made the deal.

With so many challenges, buyers must be smart. They need to handle the practical problems well. This will help make their troubled company purchases successful.

Importance of Swift Decision-Making and Preparation

In the distressed M&A world, quick decisions are key. Companies need to prepare well to act fast. They make sure they have the money and team ready. This quick action is vital because a delay may lose the chance to do a deal.

Swift decision-making

The world of private mergers and acquisitions (M&A) moves a lot of money – $2.59 trillion. Even though less M&A is happening lately, and no deal over $3 trillion was made in ten years, timing is still crucial. CEOs in the UK must change their plans as interest rates and economic changes affect M&A timings.

Good preparation helps decision-making happen fast and makes offers more attractive. Big companies have seen great success when they carefully spend their money. This method shows how important it is to check everything carefully, especially when IT is a big part of a merger’s success.

Leaders should also use clever strategies in buying and selling shares and taking risks to do well in M&A. The tech industry’s focus on AI and fitting technologies also supports this. In 2021, more SPAC money was raised than in the whole year of 2020. This shows how important it is to schedule buyouts well, tied to saving money.

Being quick and ready makes companies stand out in tough M&A conditions. Quick adapting can lead not just to surviving but possibly thriving in these complex times.

Understanding the Distress Spectrum

Finding where a company sits on the distress scale is key to striking the right deal. This ranges from mildly pressured companies to those on the brink of collapse. Knowing this helps in deciding what steps to take. It also affects things like how quickly to act, the deal type, chance for a smooth sale, and risk of non-payment.

In 2023, the UK could face a surge in distressed M&A activity because of shaky economic conditions. This includes high inflation and interest rates. For buyers in these scenarios, it’s crucial to differentiate between light and deep distress. Quick asset sales can be better. They let buyers pick valuable assets while avoiding certain burdens. In such cases, buyers who speed up their checks usually win out.

If a company is near bankruptcy, purchasers might wait for it to officially fail before buying. This often relies on how critical the situation is. Yet, during insolvency proceedings, detailed checks are tough. This is because key financial facts and staff might be off-limits. Still, to cut down on risks, buyers use special insurance. But the cost can be hard to pinpoint due to the target’s unclear financial state.

Also, knowing the depth of a company’s distress helps deal with risks post-sale. For instance, undervalued deals might lead to problems. Sectors like struggling retail, big pharma, and areas dependent on non-essential spending are at high risk. Recognising these details is crucial for those looking to invest or advise in the stressed M&A realm. It ensures smart and well-informed choices.

Strategies for Structuring Deals

In troubled M&A deals, choosing how to structure them is a big deal. You must decide between selling assets or shares. There are risks to consider, as well as how you want to manage debts. Selling assets lets buyers only get the best parts and avoid the bad debts. On the other hand, selling shares might be better to keep the company’s worth and running as it is.

It’s crucial to divide risks carefully. With more distressed assets but fewer deals happening, the UK market is tough. Private equity firms are very active here with lots of money. They look for new and smart ways to do deals. Selling assets lets buyers choose what they want and lowers the risks involved in these tough deals.

New tech like AI and machine learning is changing how we check out companies before buying them. This makes our checks more accurate and faster. Blockchain is making things safer and clearer in deals. Virtual Deal Rooms allow deals to be done from far away. This lets more people from around the world join in.

Quick, smart choices are vital in these fast-changing deal markets. Sustainability and green bonds are becoming more important. With troubled deals, deciding quickly how to mix selling assets or shares is key to making a deal work.

Due Diligence Process in Distressed M&A

Corporate insolvencies in England and Wales have hit a high since 2009. They’re sparked by the end of Covid-19 support, debt pile-up, inflation, and the hike in interest rates. This poses a big challenge in the due diligence process in distressed M&A situations. These deals often require quick decisions, putting the focus on reducing risk and spotting any hidden liabilities to protect the buyer.

In England, companies facing bankruptcy come in two types: those that aim to reorganise and those that just need to sell off everything (liquidation). If a company can’t pay its debts or has more debts than assets, they might sell under distress. This makes the need for careful due diligence very important. Buyers must deeply investigate to find any hidden debts and check who really owns the assets.

There’s been a rise in Company Voluntary Arrangements or CVAs, jumping up 14% in October 2023 from September 2022. For a CVA to go forward, 75% of the company’s creditors who vote must agree. It shows that getting the creditor data right is super important. Also, restructuring under the Companies Act 2006 might mean creditors have to make deals they don’t really want to.

The number of Distressed M&A deals has gone up because of uncertain economic times. This means buyers have to do their homework fast. Sellers are keen to sell quickly to avoid losing value if key staff or contracts go. As a result, buyers often get offered fewer promises or protections in the deal. They need to look closely at key areas like how the deal is financed, the IT and intellectual property, tax issues, and the rights under any existing contracts.

Finding out about liabilities takes centre stage, especially when looking at any issues related to security, employee rights, or pensions. In these cases, such legal steps as the National Security and Investment Act 2021 can affect the deal. Buyers need to protect themselves against any mistakes early on by doing really detailed due diligence. They can even get insurance for any surprises, like warranty and indemnity (W&I) insurance.

Risk Allocation in Distressed M&A Transactions

Distressed M&A deals need careful risk sharing for both buyers and sellers. Buyers often rely on W&I insurance to reduce their risk. This insurance helps when sellers cannot provide guarantees. But, buyers must know the insurance’s limits and what it doesn’t cover.

Managing the challenges is key in these deals. Sellers want quick deals, pushing buyers to make fast decisions. This can lead to less thorough checks before buying, with buyers focusing on the big risks.

Using contingent consideration can help if there’s a disagreement on the business’s value. These are ways to pay that depend on certain future events. But, this can make offers less attractive, as buyers try to juggle flexibility with clear terms.

Sellers want to ensure the deal goes through with no surprises. They try to avoid clauses that let buyers back out. Buyers, on the other hand, want protection from sudden big risks.

W&i insurance

Finally, buyers should watch out for issues after the sale. If the deal was undervalued, sellers might try to take back some money. So, having a solid strategy to deal with challenges post-sale is a must to protect the buyer’s interest.

Legal and Regulatory Considerations

In today’s legal world, legal and regulatory issues are key in troubled M&A deals. The number of companies going insolvent in England and Wales is at its highest since 2009. This is mainly due to debt after the pandemic, high inflation, and rising interest rates. Buyers and sellers must carefully deal with the legal parts of insolvency laws and what creditors want.

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Troubled M&A deals often happen fast. This means there’s less time for proper checks. Main checks focus on money issues, law matters, and big employee topics. Also, companies in trouble may not guarantee much about what they’re selling. They often only confirm they legally own it and can sell it.

Regulations are a big deal too. There are certain ways companies can try to fix their money problems, like Administration or using a Company Voluntary Agreement (CVA). The use of CVAs went up by 14% in October 2023, showing they’re popular for fixing things. But, a CVA only works if 75% of people owed money agree to it. Plus, it’s watched over by a pro in fixing money messes.

Even deals that cross borders need lots of checks, especially in fields like health and keeping the nation safe. Plus, issues like keeping fair competition matter in these deals. It’s really important to solve these problems up front. This is to make sure everyone involved is looked after and that all rules are followed.

Key Stakeholders and Decision Makers

In the world of stressed M&A deals, it’s vital to spot and know the top key players. The lead spots go to the senior secured lenders. They have a big say in how things change as they often have a lot of money at risk. They’re extra careful now because interest rates are very high, the most in over 20 years. So, they really check if their money will come back to them.

Other key players are the shareholders and the company’s bosses. They feel the squeeze the most when a company is in big trouble, for example, in building, selling things, and hospitality businesses. They have to move fast and wisely. Soon, about hundreds of billions of loans for business properties will need sorting out in 2023-2024. This will push local banks, who have a lot in these real estate loans, to change their plans. There’ll be a lot more checking of money situations now. This is key because many companies in the healthcare, shopping, and real estate world are being forced to take a timeout (Chapter 11).

Plus, looking at who might show interest in these troubled deals matters a lot. Big companies trying to protect their turf are different from the smart money folks, like hedge funds and private equity funds. They have unique ways of dealing with troubled assets, which really decides what happens next. We expect more M&A deals soon. This highlights how crucial it is to get what these key players want to make it through smoothly in the stressed M&A area.

UK Distressed M&A Market Challenges

The UK distressed M&A market faces tough times. Insolvencies in England and Wales stand at a peak not seen since 2009. This is because of the end of Covid-19 support, debt rise, high inflation, and increasing interest rates.

More distressed M&A deals are happening due to these tough conditions. They need to be quick, often finalized in just days. Buyers check assets they’re buying very briefly, and sellers are shy to offer strong guarantees. This makes deals riskier.

In October 2023, Company Voluntary Arrangements (CVA) rose by 14% from the year before. Firms in trouble can make deals with creditors or members under the Companies Act 2006. But, if things don’t improve, they could face liquidation any time.

The amount of distressed M&A deals post-pandemic was not as high as expected. Many UK businesses are struggling with supply chain and employee issues. Sectors like retail and hospitality are hit hard. Even energy firms are facing tough times.

Directors have a big role in protecting creditors’ rights in these deals. They must avoid wrongful or fraudulent actions to stay clear of trouble. Directors should get advice if their company is close to going under in a deal.

Conclusion

Navigating the UK’s M&A challenges needs great planning and quick thinking. Overall M&A activity fell by 18% from 2022 levels and was nearly one-third lower than in 2021. But, the rise of 20% in distressed assets signals both new opportunities and tough hurdles.

Sectors like health saw more deals in 2023 than before. Private equity firms have a lot of money to invest. They often focus on technology, including AI, IoT, and cybersecurity. This matches the growing trend of using ESG principles in deals.

Private equity is getting more specialised within specific sectors. They are showing more interest in green deals, including green bonds. New tech like AI, blockchain, and Virtual Deal Rooms are making deals smoother and quicker.

Experts predict more difficult situations starting in Autumn because of economic effects from the pandemic. Government support is also decreasing. It will be a challenge for buyers and advisors, but teams that really understand the market can still be successful.

Written by
Scott Dylan
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Scott Dylan

Scott Dylan

Scott Dylan

Scott Dylan is the Co-founder of Inc & Co, a seasoned entrepreneur, investor, and business strategist renowned for his adeptness in turning around struggling companies and driving sustainable growth.

As the Co-Founder of Inc & Co, Scott has been instrumental in the acquisition and revitalization of various businesses across multiple industries, from digital marketing to logistics and retail. With a robust background that includes a mix of creative pursuits and legal studies, Scott brings a unique blend of creativity and strategic rigor to his ventures. Beyond his professional endeavors, he is deeply committed to philanthropy, with a special focus on mental health initiatives and community welfare.

Scott's insights and experiences inform his writings, which aim to inspire and guide other entrepreneurs and business leaders. His blog serves as a platform for sharing his expert strategies, lessons learned, and the latest trends affecting the business world.

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