Bankruptcies and Mergers: Going From Bad To Good or To Worse?

General Business News

May 2002

Bankruptcies and Mergers: Going From Bad To Good or To Worse?

Over 1.5 million new bankruptcy cases were filed for 2001. This is not surprising given this country'??s general economic downturn combined with the events of September 11. So we thought for this month'??s article, we would look at what options might be available to companies experiencing financial difficulties in these uncertain times.

There are four basic alternatives to turning around an underperforming company:

Restructuring your Company through new ideas, staffing, etc. This should be the line of first defense. Restructuring can be a powerful tool and should also be considered ongoing in even the best-performing companies. However, it may not be powerful enough to reverse a continuing negative trend in your business.
Court-Ordered Bankruptcy Protection may provide an excellent way for upside-down companies to restructure and reorganize their business by giving them a little economic breathing room on their accounts payable and other protections.
Merging or selling a distressed company can offer a solution. While this can be the best of all solutions, if it works well, beware of the '??dark side'?? in that things can quickly go from bad to worse.
Total Liquidation of a failing company is the option of last resort. Make sure you have explored all other survival techniques first.

Mergers and bankruptcies are a time of uncertainty and stress, and all impacted need to be informed to control the chaos. Be honest with all involved but make sure you are prepared for these statements to end up in court. Follow these steps:

The Business'?? Story. Make sure you have communicated the story of your downfall correctly to your attorney and that he understands it. He will need to convey this to the bankruptcy judge effectively. This is key in protecting your company'??s value.
The Critical Path. Develop a plan and critical path for the proceedings is almost as important as the bankruptcy itself. Everyone needs to be informed and know their part. This will prevent more stress and chaos.
Communicating. Do not leave any important parties guessing. Be consistent with your messages. This will keep confidence and credibility levels higher and preserves as much of the companies value as possible.
Last-Minute Surprises. Be prepared for the unexpected. It will happen.

Mergers and acquisitions have slowed down since Wall Street continues to punish companies whose growth is driven solely by acquisitions. However, one would be a fool not to look into the opportunities presented by bankruptcies.

It is a fact that nearly half of all mergers fail. Haven said this; the most important process to undertake is the due diligence of both companies. Take a hard look at everything and question everything. Ask yourself these:

Will our core vision or strategy be changed with the merger?
Will, we accurately analyze our return on investment objectives, and how soon will we meet them?
What response will we be met with from key players, such as vendors, customers, employees, etc.?
How will divesting of certain products, services, or employees affect future success?
Will the lines of authority and responsibility be clearly articulated throughout every level of the organization?

Clear expectations from the new management team can help prevent disaster during and after the merger. Make sure all the issues are resolved before inking the deal.

Do your homework and stay true to your original business model and strategy to keep a bad situation from worsening in a merger or acquisition. If bankruptcy is your only option, always communicate honestly to all involved and be fair. This is a truism that keeps all areas of life easier.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.