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As the current recession unfolds, indications are that corporate executives and strategists will be making decisions in an economically distressed environment for some time to come.[1] Historically, investment and M&A activity tend to decline during periods of economic distress. However, a specialty form of acquisition, known pejoratively as "vulture investing" has flourished during such times. Perhaps because it has been practiced as a specialty by financiers accustomed to balancing high risks for quick rewards, acquiring distressed companies has not been widely viewed as a corporate strategic opportunity. Recently, however, distressed M&A has become more common:
- as of April of 2009, there were 60 distressed M&A deals for the year including Valero Energy Corporation's purchase of VeraSun Energy Corporation's assets in bankruptcy;
- in 2008, there were 220 distressed deals; and
- in 2007, there were 134.[2]
When assessing distressed M&A opportunities, corporate strategists should leverage their industry knowledge and expertise to search for hidden value, and also to select qualified industry experts to validate strategic and valuation assumptions. The interesting bankruptcy of Marvel Entertainment Group, Inc. (Marvel) demonstrates the kind of hidden value-based opportunities that are sometimes found in distressed M&A. The Marvel bankruptcy also answers a number of distressed M&A questions such as:
- How does a firm with a great performance record like Marvel become a distressed investment? (Marvel was acquired in 1989 for $82.5 million; in 1996, the day before its first bankruptcy reorganization plan was announced, it had a market value of approximately $471 million.[3] )
- How should a distressed firm be valued in a bankruptcy proceeding - on a liquidation basis or a going-concern basis?
- What are distressed-related risks,[4] and how should they be examined in the context of recommendations for pursuing corporate distressed M&A opportunities?
- In such deals, what are the advantages that corporate strategists have over investors focused on quick returns?
Distressed M&A can also be strategically risky, for example, when seeking to achieve synergies. However, if properly evaluated, carefully selected distressed M&A opportunities could become a valuable corporate strategy alternative, especially during troubled economic times.
Marvel: the back story
At its core, Marvel is a publisher of comic books featuring proprietary characters such as Spider-man, X-Men, etc. In terms of popularity and creativity...