Advising companies in bankruptcy.

As activity in the traditional M&A markets declined, many investment banking firms began migrating their practices into the distressed M&A arena, and in particular to advising companies that have filed for chapter 11 bankruptcy protection. But for firms accustomed to handling traditional M&A assignments, this transition can be a difficult one because an entirely different set of skills and rules apply in bankruptcy. More specifically, chapter 11 M&A diverges from traditional M&A in three primary areas, including: (a) the time available for completing a transaction, (b) the constituents involved in approving a sale, and (c) the target universe of buyers.

Compressed Timeframe for Completing a Transaction: The time available for selling a company within bankruptcy is typically much shorter than the traditional 120-360 days for an out-of-court transaction. In fact, it is not unusual for the process to require a sale within 90 days or less. The reasoning for this compressed timeframe is based largely on common sense, for a company operating under bankruptcy protection may rapidly decline in value due to the loss of key employees and customers. As a result, an investment banker interested in taking on clients in bankruptcy must be capable of marketing companies within a shorter timeframe than they may be accustomed; and given the accelerated time line common to sales under chapter 11, teams accustomed to handling multiple assignments at one time may not be able to take on an equivalent number of bankruptcy assignments.

Diverse Constituents Involved in Approving a Sale: Unlike an out-of-court transaction, a judge must approve the sale of a company in bankruptcy. However, in determining whether to approve a sale, the judge must take into account the efficacy of the sale process and the views of the company's various stakeholders, including the secured creditors, unsecured creditors, employees, stockholders, bankruptcy trustee and other parties that may have a meaningful stake in the outcome. This approval process makes the investment banker's job more complicated, for the banker must be able to provide expert testimony that clearly demonstrates to the judge that the winning bidder's offer represents the "highest and best" offer for all stakeholders, not just the company's shareholders.

Distinct Universe of Potential Buyers: A significant benefit to buying companies in chapter 11 is that the target's assets can be purchased free and clear of any existing or contingent liabilities. As a result, a wider universe of strategic buyers can often be brought to the table than in a traditional out-of-court deal; especially in cases where the bankrupt company retains significant brand equity or similar intellectual property. On the other hand, companies operating in bankruptcy are typically losing money, thereby eliminating the majority of financial buyers that would otherwise consider the company an attractive target.

The selling of Bike Athletic to Russell Corporation earlier this year illustrates each of the above points. In this case, we were retained by the unsecured creditors committee after the company was unable to secure financing for a plan of reorganization, and then given only 45 days by the senior creditor to find a buyer for the company or face liquidation. In order to meet this challenging deadline, we reallocated internal resources so that its distressed M&A team could focus exclusively on the deal. Second, we contacted all of the various constituents in the case to determine their expectations for the company as well as to educate them on our role in marketing the assets. Lastly, we aggressively marketed Bike's assets to qualified strategic and financial buyers both in North America and overseas that could move quickly in preparing an offer.

As suspected, potential buyers had little interest in the company's domestic manufacturing assets. However, significant interest was generated for acquiring the Company's trademarks, which remained among the best known in the sporting goods industry, and other intellectual property. In the end, we attracted eight companies to participate in the auction for Bike's assets; and successfully increased the purchase price fourfold to a level that generated sufficient proceeds to pay off the secured creditors and provide a significant recovery for the unsecured creditors in the case.

Despite an improving economy, many companies will continue to seek protection from creditors through chapter 11, and many of these will require the assistance of investment bankers in selling their companies. To maximize their recovery, creditors and shareholders will be advised to work with investment bankers and other professionals that are specialists in this unique process.

Erik R. Jordan is a Vice President in the Investment Banking Group of Trenwith Securities, LLC.