Mimi Wu, a Partner at Sullivan & Cromwell, specializes in distressed M&A, having tackled notable restructurings like FTX and Silicon Valley Bank. She breaks down the intricacies of Chapter 11 bankruptcy and explains the benefits of 363 sales, where buyers can secure assets without inherited liabilities. Mimi also shares strategies for engaging creditors during tough negotiations and highlights how investors can spot lucrative distressed deal opportunities before they go to auction. This conversation is filled with invaluable insights for anyone navigating financial turmoil in business.
Understanding Chapter 11 bankruptcy is crucial as it provides a structured framework for financially distressed companies to reorganize.
The 363 sale process offers unique opportunities for buyers to acquire assets free of liabilities, making it an attractive option in distressed M&A.
Navigating creditor negotiations effectively is essential, as aligning interests among secured and unsecured creditors can significantly influence restructuring outcomes.
Deep dives
Challenges of Contract Review in M&A
Contract review is a significant time and cost factor in the M&A process, often involving extensive documentation such as employment agreements and vendor contracts. Key details like change of control provisions and consent clauses can be buried within these documents, making it tedious to comb through them manually. Traditional methods for contract analysis can consume hundreds of hours, creating inefficiencies and potential oversights. The introduction of AI-powered tools, such as Dealroom AI, promises to streamline this process by quickly extracting and highlighting critical information, thus significantly reducing the time invested in contract review.
Understanding Distressed M&A and Restructuring
Distressed M&A involves navigating the complexities that arise when companies face financial difficulties, often leading to Chapter 11 bankruptcy filings and potential restructurings. Restructuring encompasses various options, from negotiating with creditors to considering asset sales, with Chapter 11 providing a formal legal framework that can safeguard a company during its transition. Key to this process is the 363 asset sale, which allows for the expeditious sale of assets, free and clear of existing liens and liabilities, thereby maximizing value for creditors. Understanding the nuances of distress, such as how companies like FTX have navigated crisis situations, is essential for effective restructuring.
The Role of Creditors in Distressed Scenarios
In a distressed M&A context, creditors play a pivotal role, from those holding secured claims to unsecured creditors who may organize into committees to have their interests represented. Successful navigation of bankruptcy often requires engaging with creditors proactively to negotiate terms such as forbearance or to obtain additional capital, should liquidity be a concern. The dynamics of disciplining creditor influence, particularly identifying fulcrum creditors who potentially decide the restructuring outcome, are crucial for navigating the bankruptcy process. Recognizing how to align stakeholders for maximum value recovery is essential in distressed situations.
Auction Processes and Bidding Strategies in Bankruptcy
The auction process in bankruptcy aims to achieve the highest value for the debtor's assets, often involving structured sales processes that include qualified bids and auction dynamics. Crucial elements include the appointment of a stalking horse bidder, which sets a floor price and provides bid protections to attract competitive offers. During the auction, creditors also have the opportunity to place bids, adding another layer of complexity to maximize asset recovery. By understanding these bidding strategies and market dynamics, potential buyers can position themselves advantageously when participating in distressed asset auctions.
Navigating the Aftermath of Bankruptcy
Following a Chapter 11 process, the distribution of proceeds from asset sales is structured according to a frozen priority system for creditors, from secured claims to potential distributions for unsecured creditors. While secured creditors often recover their investments, liquidity remains tight, and negotiations around leftover liabilities and how to settle claims can extend for months. Understanding the fallout from bankruptcy, particularly how assumptions and rejections of contracts can affect ongoing operations and vendor relationships, is vital for businesses involved in the restructuring process. The resolution of these matters not only impacts the current stakeholders but also sets the groundwork for future operational stability.
When a company is struggling financially, M&A can be a lifeline—but navigating distressed deals is a whole different game. In this episode of the M&A Science Podcast, Mimi Wu, Partner at Sullivan & Cromwell, breaks down how Chapter 11 bankruptcy, 363 sales, and creditor negotiations come into play when businesses are in distress.
Mimi has worked on some of the biggest restructuring cases, including FTX and Silicon Valley Bank, and she’s here to explain how distressed M&A really works—without the legal jargon. Whether you’re an investor, a corporate executive, or just curious about how companies handle financial trouble, this episode is packed with insights.
Things you will learn:
What is Chapter 11? – How bankruptcy protects businesses and gives them time to reorganize
The Power of a 363 Sale – Why buyers love these deals and how they can acquire assets “free and clear”
Negotiating with Creditors – What happens when companies can’t pay their debts, and the options they have
Finding Deals in Bankruptcy – How investors and buyers can identify distressed M&A opportunities before they hit the auction stage
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This episode is sponsored by DealRoom AI. Forget spending hours reviewing diligence contracts. Automate the extraction and analysis of key information and create quick summary reports. Harness the power of Buyer-Led M&A with DealRooms proven framework. Visit DealRoom.net to learn more.
Trailer Timestamps:
[00:03:01] – What is Distressed M&A? Key Differences from Traditional M&A
[00:05:32] – Chapter 11 Bankruptcy: How It Works and When to Use It
[00:06:30] – 363 Asset Sales: Selling a Business in Bankruptcy
[00:09:11] – Why Companies File for Bankruptcy: Common Triggers
[00:10:36] – The Automatic Stay: Protecting Companies During Bankruptcy
[00:14:00] – Alternatives to Bankruptcy: Negotiating with Creditors & Raising Capital
[00:18:30] – How the Bankruptcy Sale Process Works: Auctions & Market Checks
[00:20:41] – Credit Bidding & How Creditors Influence the Sale
[00:24:02] – The 363 Auction Process: How Bidding Works
[00:26:39] – Stalking Horse Bids: What They Are & How They Work
[00:29:30] – How Sale Proceeds Are Distributed Among Creditors
[00:33:00] – Case Study: Carrier & Ketafenol Bankruptcy Sale
