Distressed acquisitions are by their very nature opportunistic purchases, and as such buyers often don’t have the time, or ignore the reasons for the businesses failure in the first place, and in doing so fail to realise the full benefits of the acquisition.
Broadly business failures fall into three categories:
- The Big Fail – these are the one off transactions that can be quarantined into a specific set of circumstances i.e. a lost litigation, too much debt, an unprofitable location, a failed diversification or investment.
- The Scalability Failures – surprisingly, as many businesses fail during a boom as a bust. These are the businesses that cannot fund their own growth, where revenue grows at a greater rate depleting working capital, or the opposite, where revenue falls at a faster rate than a business can reduce costs.
- Management, and this is the ‘big bucket’ – into this category falls both the visionaries and the incompetents.
Too often purchasers only see the financial distress as an opportunity to discount the purchase price of a ‘good asset’ rather than an acknowledgement that the good asset is no longer good.
In a 2013 PwC survey of US Fortune 1000 companies who had been involved in merger and acquisition transactions between 2010 and 2013, 65% of respondents characterized recent deals as a success from a strategic point, while only 49% achieved financial goals and only 35% achieved operational goals.
Achieving a strategic goal is simply “completing the sale”, while financial goals and operational goals require significantly more work. What is clear is that with nearly 44% of all deals being transformational the success of these deals is being considerably over estimated at their outset.
There are usually two ways to acquire a distressed business, the traditional way through an asset sale or through a Deed of Company Arrangement. Acquiring a business through a Deed of Company Arrangement provides additional value and at lower costs than an asset sale and purchase. It is however more often used by incumbent owners rather than external purchasers.
The benefits of acquiring a business through a Deed of Company Arrangement are fourfold:
- A deed of company arrangement does not attract stamp duty on asset values.
- The Deed of Company Arrangement is a compromise of liabilities and does not consider the value of assets, such that the assets can continue to be carried at the book value.
- As there is no transfer of contracts from the company, the time costs and risks around achieving an assignment of customer, supplier and landlord contracts is eliminated or limited.
- To the extent the acquirer continues the same business, accrued tax losses less any debt forgiveness will be available to the purchaser.
In 2014 the Queensland University of Technology (QUT) produced a report based on a sampling of 72 out of a total 350 deeds of arrangement effected in Australia between August 2012 and July 2013 only 28% of cases were found to be genuine reconstructions. If you extrapolate these figures over an average of 1,633 voluntary administrations a year this equates to only 8.6% genuine reconstructions in Australia.
The same QUT study indicated that the level of dividends in the sample of deeds was 3.7 cents for large companies and 9.7 cents for small companies, a median of 5.4 cents. With the dividend distribution at this level, it is clear that dividends, are not the predetermining factor for creditors supporting Deed proposals. Creditors are looking for certainty in supporting a sustainable business going forward.
DEM Asia Group manages the process for you:
- Negotiating the selection and or funding for the Administration process;
- Preparation of the Deed proposal;
- Preparation of business strategy and supplier presentations;
- Communication planning with stakeholders;
- Voting and proxy management;
- Finalisation and Execution of Deed terms; and
- Post Deed accounting and management statements.
The Deed once its terms are satisfied affectively creates a statutory bar to company claims which arose before the commencement of the voluntary administration.
Setting aside a resolution or terminating a Deed
Section 600A of the Act provides that the Court has powers to set aside the resolution approving the DOCA in the event that the DOCA has yet to be executed.
Section 600A provides that the DOCA resolution can be set aside if, among other things not relevant, the votes of related creditors are disregarded then the resolution that was in fact passed would not have passed (Section 600A(1)(b)(ii)).
Section 445D of the Act provides that the Court may make an order terminating a deed of company arrangement if satisfied that:
- information about the company’s business, property, affairs or financial circumstances that:
- was false or misleading; and
- can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
- such information was contained in a report or statement under subsection 439A(4)that accompanied a notice of the meeting at which the resolution was passed; or
- there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii) contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
Accordingly, an application may be brought under subsection 445B (a), (b), (c), (e) and/or (f) of the Act seeking to terminate the DOCA returning the Company to liquidation.
That application can be brought by an interested party or creditor of the Company (Section 445B(2)).
All these issues can be addressed through careful planning, negotiation and clear disclosure in the Administrators Report and Deed Proposal.