Description
Economic uncertainty, heightened global competition, evolving government regulation, and rapid technological changes can prove challenging for many companies.
M&A snapshot 1
Mergers & acquisitions
— a snapshot
Changing the way you think
about tomorrow’s deal
Stay ahead of the accounting and reporting standards for M&A
1
Companies in distress: A successful
turnaround requires decisive action
Economic uncertainty, heightened global competition, evolving government
regulation, and rapid technological changes can prove challenging for many
companies. In many cases, decisive actions in implementing financial and
operational restructurings may successfully turn around a company in distress.
In other cases, the challenges may prove too daunting and a bankruptcy filing
may be necessary. While bankruptcy filings have slowed from their highs right
after the financial crisis, they continue to exceed one million filings per year in
the U.S.
For companies in this type of financial or operational distress, it is often
difficult to know when to take action and where to turn for assistance. This
edition of Mergers & acquisitions — a snapshot, is the first in a series focused
on the relevant considerations prior to, during, and after a bankruptcy. This
edition provides leading indicators of companies in distress, an overview of the
turnaround process, actions management can take to turn the business
around, and how a turnaround advisor may help.
1
Accounting Standards Codification (ASC) 805 is the U.S. standard on business combinations.
ASC 810 is the U.S. standard on consolidation (collectively, the “M&A Standards”). ASC 852 is the
U.S. standard on reorganizations (the “Reorganization Standard”).
October 15, 2014
What's inside
Knowing when to take
action ...................................... 2
The turnaround process ........... 2
Conclusion ................................. 4
M&A snapshot 2
Knowing when to take action
When faced with severe financial and operational troubles,
companies tend to wait too long to initiate turnaround
activities. The more financially distressed a company is,
the fewer the options that may be available to fix the
problems and rapidly put the company on the right path.
The first signs of distress usually manifest as a significant
decline in profitability, which negatively impacts cash flow.
Over time, the liquidity drain from underperformance can
eat away at the financial well being of the company and
ultimately result in:
? Constraints that limit the company’s ability to operate
efficiently and meet obligations on a timely basis
? Debt covenant violations that accelerate liquidity
issues
? Limited access to traditional debt and equity capital
sources
? Overleverage that causes key stakeholders, including
vendors, customers, and employees, concern and
potentially motivates them to reassess their
relationships with the company
Business challenges can present opportunities to change
and grow the business, but companies need to mobilize
quickly to prevent a further decline into bankruptcy.
Key accounting considerations – These business
challenges can lead to a number of challenging accounting
and financial reporting issues. Continued operating losses
and negative cash flows will likely result in the need to
consider the potential for goodwill and long-lived asset
impairments, as well as the recoverability of working
capital accounts, such as accounts receivable and
inventories.
Deteriorating financial conditions may also lead to debt
covenant violations. Covenant violations often result in the
debt being due on demand by the creditor, which requires
current classification of such balances on the balance
sheet, further challenging the company's ability to
continue as a going concern.
The turnaround process
There are typically three phases in a successful
turnaround: (1) Stabilize the situation, (2) Assess the
operational and financial alternatives, and (3) Implement
the turnaround. Some key considerations for each phase
are discussed below.
Stabilize the situation
The first step of any turnaround is to stabilize the finances
and operations of the distressed company and provide
confidence to all stakeholders that proactive steps are
being taken to preserve value. The initial focus should be
on developing liquidity forecasts and improving cash flow
management to provide the time needed to properly assess
potential alternatives.
Assess the operational and financial alternatives
Next, the company should assess its operational and
financial alternatives to maximize the value of the
turnaround plan. While industry-specific operational
expertise is critical, a multi-disciplinary team with
expertise in financing, tax, valuation, operations, legal, and
country or territory specific matters is often essential.
Business planning, financial forecasts, and related
valuation – The development of a business plan and
related financial forecast serves as the backbone to any
strategic alternatives analysis. A business plan is
developed by defining business objectives, reviewing
industry and competitive landscapes, analyzing business
lines, and assessing risk factors.
Integrated financial forecasts should be developed to
reflect the economic impact of the various business plan
alternatives. Based on those forecasts, the enterprise value
of the various alternatives can be determined, striving for a
balance between value maximization and risk mitigation.
Analyze financial alternatives – Once the business
plan options are narrowed down, the liquidity needs
should be analyzed, as well as the debt capacity and
optimal capital structure of the business, taking into
consideration the dynamics of the marketplace. This
analysis will be compared to the company’s existing capital
structure to determine whether it is workable given the
new realities of the business or if a restructuring or
recapitalization would be more beneficial. This review
should include evaluating the cost of debt, lender
covenants, equity components and future capital
requirements. If the company requires additional liquidity,
M&A snapshot 3
the ability to place new capital within the existing capital
structure will also be analyzed. This may be the most
effective solution if a company simply needs additional
liquidity to bridge the turnaround of the business. For
larger liquidity needs, a more robust restructuring or
recapitalization may be required.
Key accounting considerations – A company may
consider restructuring its debt as part of the turnaround
process. A debt restructuring may be achieved by repaying
or exchanging existing debt with new debt with the same
lender or otherwise amending the terms or cash flows of
the arrangement. In some cases, the existing debt will be
partially or fully settled. In other cases, interest expense
will be affected prospectively. In either event, the
accounting treatment for new and existing debt issue costs
and costs paid to the lender will need to be considered.
Implement the turnaround
Implemention can take various forms. There are generally
three potential operational alternatives when assessing the
path forward:
? Keep and restructure
? Sale as a going concern
? Wind-down and exit
Gathering complete data is essential to the process. Each
of these strategies are discussed below.
Keep and restructure – Solutions should be developed
with the goal of delivering sustainable change and
continuous process improvement. These solutions will
focus on lowering operating costs, improving cash flow,
and developing efficiencies that can lead to increased
market share and higher margins.
Operations can be optimized by addressing the following
opportunities:
? Sustainable cost reduction: driven by transparent
management of information and accountability
? Supply chain management: improving supply chain
processes and eliminating risks so that the company
can anticipate, create and manage changes necessary
to remain competitive
? Customer impact: understanding what customers
want, need and value most to gain a competitive
advantage
? Revenue growth: moving from strategy development
and opportunity assessment to implementation and
consistent execution
? Corporate performance management: translating the
company’s strategy into financial and operational
plans and then measuring how well the company is
meeting those plans
Key accounting considerations – The strategies
outlined above will often result in a fundamental change in
the scale, location and operational direction of the
business. A restructuring may involve the closing or
consolidation of operating locations, terminating
employees, or cancelling or exiting operating leases and
other long-term contracts. Many of these actions will result
in current period accounting charges, which will impact
the company’s financial performance as management
begins the turnaround. Disclosure of the company’s
performance in executing its plans will likely be key in its
communications with stakeholders.
Sale as a going concern – The sale of a distressed
business is a distinct process that requires specialized
expertise. A bankruptcy filing is often utilized as a
corporate finance tool. Following are some of the key
considerations that are unique to the distressed M&A
process:
? Valuation: distressed company valuation requires
modifications to the conventional M&A valuation
methods, including comparing going concern values to
liquidation values, determining which assets and
liabilities are part of the sale, and assessing which
sales process will optimize value
? Process: uncertainty created by distress within a
company’s customer or supplier base often requries an
accelerated sale process. Trade-offs may be required
between the increased value generated by a robust
marketing process versus the diminishing value
created by the consumption of cash or the loss of key
customers or vendors. Having the ability to quickly
articulate the value of the enterprise and avenues for
buyers to stabilize and turn around the target are key
to maximizing the proceeds to the seller.
Sale
St rategy
and
Planning
Formal
Marketing
Buyer Due
Diligence
Negotiation
/Close
Wind Down
St rategy
and
Planning
Operational
Wind Down
Cor p Wind
Down
Closure
Exit
Keep and
Restructure
Operational
Alternatives
Operational Improvement
? Multiple stakeholders: distressed situations frequently
include negotiating with multiple stakeholders with
conflicting agendas. Knowing how to organize,
communicate and align various stakeholders is critical
when dealing with distressed situations
Wind-down and exit – While management may be
proficient at running operations on a day to day basis,
winding down a business brings unique challenges and
requires different skillsets. Specialists can be helpful in
assisting companies develop plans to efficiently wind down
the business and avoid potential pitfalls. Challenges that
may need to be addressed include:
? Developing a strategy for ceasing operations (e.g.,
close quickly, selling off inventory, phased closure)
? Evaluating the impact on relations with customers and
suppliers
? Understanding the implications on contractual
obligations
? Developing a cost/benefit analysis for the funding of
on-going losses
? Analyzing funding requirements and funding sources
? Assembling a wind-down project team, structure, and
lines of communication
? Developing a key-employee retention program
? Ascertaining tax implications
? Determining how to manage communications to
stakeholders and any public relations requirements
Turnaround advisors have extensive experience in helping
clients shape and then develop detailed plans for winding
down businesses. By virtue of their experience, they can
identify the potential pitfalls and strategize how to work
around them. Their experience and credibility can assist
with securing wider stakeholder buy-in with, among
others, financing sources, unions, employees, and pension
trustees.
Conclusion
Financial and operational underperformance does not
always signal the beginning of the end for distressed
companies. Decisive and timely actions, with the benefit of
advice from experienced professionals, can begin a
successful turnaround of the business that refocuses
strategy and ultimately creates value for all stakeholders.
Stay tuned for future editions in our series on companies
in distress, which will highlight considerations during and
emerging from a bankruptcy filing.
For more information on this publication please contact
one of the following individuals:
Perry Mandarino
Deals Partner, Business Recovery Services Leader
(646) 471-7589
[email protected]
Steve Lilley
Deals Partner, Capital Markets and Accounting Advisory
Services
(214) 754-4804
[email protected]
Principal Authors:
Lawrence N. Dodyk
Partner, U.S. Business Combinations Leader
(973) 236-7213
[email protected]
Sara DeSmith
Partner, National Quality Organization
(973) 236-4084
[email protected]
Keith Kaiser
Deals Director, Business Recovery Services
(312) 298-2811
[email protected]
© 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and
may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This
content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
doc_173436124.pdf
Economic uncertainty, heightened global competition, evolving government regulation, and rapid technological changes can prove challenging for many companies.
M&A snapshot 1
Mergers & acquisitions
— a snapshot
Changing the way you think
about tomorrow’s deal
Stay ahead of the accounting and reporting standards for M&A
1
Companies in distress: A successful
turnaround requires decisive action
Economic uncertainty, heightened global competition, evolving government
regulation, and rapid technological changes can prove challenging for many
companies. In many cases, decisive actions in implementing financial and
operational restructurings may successfully turn around a company in distress.
In other cases, the challenges may prove too daunting and a bankruptcy filing
may be necessary. While bankruptcy filings have slowed from their highs right
after the financial crisis, they continue to exceed one million filings per year in
the U.S.
For companies in this type of financial or operational distress, it is often
difficult to know when to take action and where to turn for assistance. This
edition of Mergers & acquisitions — a snapshot, is the first in a series focused
on the relevant considerations prior to, during, and after a bankruptcy. This
edition provides leading indicators of companies in distress, an overview of the
turnaround process, actions management can take to turn the business
around, and how a turnaround advisor may help.
1
Accounting Standards Codification (ASC) 805 is the U.S. standard on business combinations.
ASC 810 is the U.S. standard on consolidation (collectively, the “M&A Standards”). ASC 852 is the
U.S. standard on reorganizations (the “Reorganization Standard”).
October 15, 2014
What's inside
Knowing when to take
action ...................................... 2
The turnaround process ........... 2
Conclusion ................................. 4
M&A snapshot 2
Knowing when to take action
When faced with severe financial and operational troubles,
companies tend to wait too long to initiate turnaround
activities. The more financially distressed a company is,
the fewer the options that may be available to fix the
problems and rapidly put the company on the right path.
The first signs of distress usually manifest as a significant
decline in profitability, which negatively impacts cash flow.
Over time, the liquidity drain from underperformance can
eat away at the financial well being of the company and
ultimately result in:
? Constraints that limit the company’s ability to operate
efficiently and meet obligations on a timely basis
? Debt covenant violations that accelerate liquidity
issues
? Limited access to traditional debt and equity capital
sources
? Overleverage that causes key stakeholders, including
vendors, customers, and employees, concern and
potentially motivates them to reassess their
relationships with the company
Business challenges can present opportunities to change
and grow the business, but companies need to mobilize
quickly to prevent a further decline into bankruptcy.
Key accounting considerations – These business
challenges can lead to a number of challenging accounting
and financial reporting issues. Continued operating losses
and negative cash flows will likely result in the need to
consider the potential for goodwill and long-lived asset
impairments, as well as the recoverability of working
capital accounts, such as accounts receivable and
inventories.
Deteriorating financial conditions may also lead to debt
covenant violations. Covenant violations often result in the
debt being due on demand by the creditor, which requires
current classification of such balances on the balance
sheet, further challenging the company's ability to
continue as a going concern.
The turnaround process
There are typically three phases in a successful
turnaround: (1) Stabilize the situation, (2) Assess the
operational and financial alternatives, and (3) Implement
the turnaround. Some key considerations for each phase
are discussed below.
Stabilize the situation
The first step of any turnaround is to stabilize the finances
and operations of the distressed company and provide
confidence to all stakeholders that proactive steps are
being taken to preserve value. The initial focus should be
on developing liquidity forecasts and improving cash flow
management to provide the time needed to properly assess
potential alternatives.
Assess the operational and financial alternatives
Next, the company should assess its operational and
financial alternatives to maximize the value of the
turnaround plan. While industry-specific operational
expertise is critical, a multi-disciplinary team with
expertise in financing, tax, valuation, operations, legal, and
country or territory specific matters is often essential.
Business planning, financial forecasts, and related
valuation – The development of a business plan and
related financial forecast serves as the backbone to any
strategic alternatives analysis. A business plan is
developed by defining business objectives, reviewing
industry and competitive landscapes, analyzing business
lines, and assessing risk factors.
Integrated financial forecasts should be developed to
reflect the economic impact of the various business plan
alternatives. Based on those forecasts, the enterprise value
of the various alternatives can be determined, striving for a
balance between value maximization and risk mitigation.
Analyze financial alternatives – Once the business
plan options are narrowed down, the liquidity needs
should be analyzed, as well as the debt capacity and
optimal capital structure of the business, taking into
consideration the dynamics of the marketplace. This
analysis will be compared to the company’s existing capital
structure to determine whether it is workable given the
new realities of the business or if a restructuring or
recapitalization would be more beneficial. This review
should include evaluating the cost of debt, lender
covenants, equity components and future capital
requirements. If the company requires additional liquidity,
M&A snapshot 3
the ability to place new capital within the existing capital
structure will also be analyzed. This may be the most
effective solution if a company simply needs additional
liquidity to bridge the turnaround of the business. For
larger liquidity needs, a more robust restructuring or
recapitalization may be required.
Key accounting considerations – A company may
consider restructuring its debt as part of the turnaround
process. A debt restructuring may be achieved by repaying
or exchanging existing debt with new debt with the same
lender or otherwise amending the terms or cash flows of
the arrangement. In some cases, the existing debt will be
partially or fully settled. In other cases, interest expense
will be affected prospectively. In either event, the
accounting treatment for new and existing debt issue costs
and costs paid to the lender will need to be considered.
Implement the turnaround
Implemention can take various forms. There are generally
three potential operational alternatives when assessing the
path forward:
? Keep and restructure
? Sale as a going concern
? Wind-down and exit
Gathering complete data is essential to the process. Each
of these strategies are discussed below.
Keep and restructure – Solutions should be developed
with the goal of delivering sustainable change and
continuous process improvement. These solutions will
focus on lowering operating costs, improving cash flow,
and developing efficiencies that can lead to increased
market share and higher margins.
Operations can be optimized by addressing the following
opportunities:
? Sustainable cost reduction: driven by transparent
management of information and accountability
? Supply chain management: improving supply chain
processes and eliminating risks so that the company
can anticipate, create and manage changes necessary
to remain competitive
? Customer impact: understanding what customers
want, need and value most to gain a competitive
advantage
? Revenue growth: moving from strategy development
and opportunity assessment to implementation and
consistent execution
? Corporate performance management: translating the
company’s strategy into financial and operational
plans and then measuring how well the company is
meeting those plans
Key accounting considerations – The strategies
outlined above will often result in a fundamental change in
the scale, location and operational direction of the
business. A restructuring may involve the closing or
consolidation of operating locations, terminating
employees, or cancelling or exiting operating leases and
other long-term contracts. Many of these actions will result
in current period accounting charges, which will impact
the company’s financial performance as management
begins the turnaround. Disclosure of the company’s
performance in executing its plans will likely be key in its
communications with stakeholders.
Sale as a going concern – The sale of a distressed
business is a distinct process that requires specialized
expertise. A bankruptcy filing is often utilized as a
corporate finance tool. Following are some of the key
considerations that are unique to the distressed M&A
process:
? Valuation: distressed company valuation requires
modifications to the conventional M&A valuation
methods, including comparing going concern values to
liquidation values, determining which assets and
liabilities are part of the sale, and assessing which
sales process will optimize value
? Process: uncertainty created by distress within a
company’s customer or supplier base often requries an
accelerated sale process. Trade-offs may be required
between the increased value generated by a robust
marketing process versus the diminishing value
created by the consumption of cash or the loss of key
customers or vendors. Having the ability to quickly
articulate the value of the enterprise and avenues for
buyers to stabilize and turn around the target are key
to maximizing the proceeds to the seller.
Sale
St rategy
and
Planning
Formal
Marketing
Buyer Due
Diligence
Negotiation
/Close
Wind Down
St rategy
and
Planning
Operational
Wind Down
Cor p Wind
Down
Closure
Exit
Keep and
Restructure
Operational
Alternatives
Operational Improvement
? Multiple stakeholders: distressed situations frequently
include negotiating with multiple stakeholders with
conflicting agendas. Knowing how to organize,
communicate and align various stakeholders is critical
when dealing with distressed situations
Wind-down and exit – While management may be
proficient at running operations on a day to day basis,
winding down a business brings unique challenges and
requires different skillsets. Specialists can be helpful in
assisting companies develop plans to efficiently wind down
the business and avoid potential pitfalls. Challenges that
may need to be addressed include:
? Developing a strategy for ceasing operations (e.g.,
close quickly, selling off inventory, phased closure)
? Evaluating the impact on relations with customers and
suppliers
? Understanding the implications on contractual
obligations
? Developing a cost/benefit analysis for the funding of
on-going losses
? Analyzing funding requirements and funding sources
? Assembling a wind-down project team, structure, and
lines of communication
? Developing a key-employee retention program
? Ascertaining tax implications
? Determining how to manage communications to
stakeholders and any public relations requirements
Turnaround advisors have extensive experience in helping
clients shape and then develop detailed plans for winding
down businesses. By virtue of their experience, they can
identify the potential pitfalls and strategize how to work
around them. Their experience and credibility can assist
with securing wider stakeholder buy-in with, among
others, financing sources, unions, employees, and pension
trustees.
Conclusion
Financial and operational underperformance does not
always signal the beginning of the end for distressed
companies. Decisive and timely actions, with the benefit of
advice from experienced professionals, can begin a
successful turnaround of the business that refocuses
strategy and ultimately creates value for all stakeholders.
Stay tuned for future editions in our series on companies
in distress, which will highlight considerations during and
emerging from a bankruptcy filing.
For more information on this publication please contact
one of the following individuals:
Perry Mandarino
Deals Partner, Business Recovery Services Leader
(646) 471-7589
[email protected]
Steve Lilley
Deals Partner, Capital Markets and Accounting Advisory
Services
(214) 754-4804
[email protected]
Principal Authors:
Lawrence N. Dodyk
Partner, U.S. Business Combinations Leader
(973) 236-7213
[email protected]
Sara DeSmith
Partner, National Quality Organization
(973) 236-4084
[email protected]
Keith Kaiser
Deals Director, Business Recovery Services
(312) 298-2811
[email protected]
© 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and
may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This
content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
doc_173436124.pdf