Thinking Ahead: Distressed M&A In Uncertain Times

Author:Mr David A. Gibbons and Richard L. Wynne
Profession:Hogan Lovells

Almost a decade into the current bull market, many economic prognosticators are warning of a coming downturn. At the same time, political upheaval and uncertainty around the world is changing the landscape for cross-border trade—including mergers and acquisitions activity.

Hogan Lovells partners Richard L. Wynne and David A. Gibbons recently discussed how that macro environment is impacting distressed M&A today, and what steps business leaders and dealmakers should be taking to prepare for a shift in the economic winds.

Is the M&A market giving off any signals about when a downturn might arrive?

Gibbons: We have yet to see a significant shift in M&A activity. The market has slowed slightly from the first half of 2019, but that's coming off a very strong 18 months, which was largely driven by megadeals during the first half of the year. We've seen fewer of those more recently, but the middle market remains very active.

Wynne: That said, there's a lot of uncertainty out there at both the micro and macro levels. And of course, everywhere we look the political situation is challenging—with Brexit in the EU, Hong Kong protests, an on-again, off-again U.S.-China trade war, a very tense situation in the Middle East and impeachment proceedings in the U.S., plus an election coming up that presents some diametrically opposed views on economic issues.

Is that uncertainty finding its way into boardrooms, or giving dealmakers pause as they consider transactions?

Gibbons: We do see certain boards, at large conglomerates for example, rethinking their portfolios in preparation for a shift in the economic cycle. Leadership is starting to look at what assets will perform better or worse in a down cycle, and in some cases starting to consider shedding some assets while there is still a decent market for them.

Where there are real, immediate concerns for sellers, distressed or otherwise, is where the potential buyers could include entities that would invite government scrutiny. For the first time, we've seen the U.S. government block bankruptcy sales through the Committee on Foreign Investment in the United States (CFIUS). That's certainly catching leadership's attention, as it should.

When CFIUS scrutiny comes into play, how can it impact deals?

Gibbons: It can greatly impact the timing. Traditionally in distressed M&A, time is a critical factor. Sellers in need of cash want to know how quickly a potential buyer can close. That can get complicated on its own...

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