When companies face an existential crisis—or even the threat of insolvency—that doesn’t necessarily mean the company has to disappear from the market. On the contrary: Investors are competing more and more fiercely precisely for companies with a robust business model. This is one of the findings of the so-called “2017 Distressed M&A Study,” which was conducted by the management consulting firm Roland Berger. The study is based on a survey of 200 experts, most of whom are creditors, such as corporate finance professionals and insolvency administrators.
The experts attribute the increased demand to a favorable financing environment and heightened interest from foreign investors, particularly those from Asia. The decision-makers surveyed estimate that interest from Asian investors in the distressed market is the highest this year, at 82 percent. North American investors rank significantly behind at 32 percent, followed by European investors at 31 percent. The Middle East trails significantly behind at an estimated 23 percent.
In terms of industries, the automotive industry and the consumer goods sector lead the way. This year, 61 percent of respondents expect an increase in transactions in the automotive sector, while 51 percent anticipate the same in the consumer goods sector. The automotive industry is known to be the sector with the highest revenue in Germany. The consumer goods industry in Germany is characterized by a large number of small and medium-sized companies, many of which are family-owned.
While Brexit plays a major role in many economic issues, its impact is not very noticeable in the distressed market. Fifty-seven percent of the 200 respondents believe that the United Kingdom’s exit from the EU will not drive investment in German companies.
At what point do investors acquire distressed companies? 70 percent of respondents make their move before the company files for bankruptcy. In 67 percent of cases, investors buy the companies out of insolvency. “The fact that pre-insolvency processes are preferred over sales out of insolvency is consistent with our experience,” says Sascha Haghani, head of the restructuring division at Roland Berger. “Pre-insolvency restructuring has many advantages, especially for companies with ‘healthy’ business models.”
What the management consulting firm does not address in this context is that it happens time and again that investors take over insolvent companies—only to be in for a nasty surprise on the day the contract is signed: Many employees have long since left the company. The new owner must then laboriously find qualified staff all over again. A major German engineering services provider, among others, has had this experience.
The rising number of interested parties and the intense time pressure caused by favorable financing terms are also making the transaction process more complicated. Ninety percent of respondents agree with this thesis put forward by the study’s authors.
