When worlds collide: navigating M&A and restructuring in volatile global markets
02 October 2019
"Whenever there is change, and whenever there is uncertainty, there is opportunity."
Mark Cuban, American businessman and investor
In the current global market, very few things are clear other than that volatility and change are ever-present.
The economic tensions between the United States and China and the uncertainty regarding Brexit are but two of the factors that are currently casting a shadow over the global economy and impacting global growth forecasts far beyond the principal protagonists’ borders.
There are few monetary policies that the central banking institutions of the developed economies have yet to deploy. Regardless, their collective economies continue to feel the strain, and there are no clear signs that these measures will ultimately have the desired effect within the required timeframe.
Australia is no exception. Record low interest rates are pushing investors to search for yield in non-interest bearing investments, and offering business the opportunity to refinance what is now considered to be expensive debt. Much to the dismay of the Federal Treasurer, Australian businesses have, generally speaking, failed to take advantage of current market conditions to fund investment.
But while global and domestic market uncertainty presents risks, it also presents opportunities – particularly in the world where M&A and restructuring collide.
- Positioning now for growth through acquisitions
In businesses where organic revenue growth is challenging, growth through acquisition is a sound alternative and, if done right, a fast way to grow revenue and reduce costs.
Historically, a stagnant economy tended to reduce competition for assets, with the bulk of opportunities falling to buyers with stronger balance sheets and those who were confident in their ability to generate sustained profits. However, with the availability of cheap debt, all that should be set to change. Those that act with vision and anticipation of opportunities to come and position themselves to act quickly on opportunities with ready access to debt (or equity) funding will be in the driving seat. Now is the time for businesses with challenging revenue forecasts to act.
- Take advantage of a buyer’s market
The advantage of reduced competition is the additional comfort buyers are likely to be able to negotiate in transaction documentation. An increase in buyer bargaining power lends itself to more acquirer-friendly contractual provisions, such as earn-outs, escrows and robust non-compete provisions.
- Consider ‘loan to own’ alternatives
In a distressed economy, debt can be an effective tool through which companies can continue to expand by alternative means, including the ‘loan to own’ market. The traditional mechanism of acquiring equity to take control of a business should be considered alongside lateral structures such as debt recapitalisations (including debt for equity swaps) and smaller equity stakes to facilitate subsequent exits.
There are a number of examples in recent times where debt has been used as a Trojan horse. Corrs acted for CBS in its acquisition of the secured debt of Network Ten and the ensuing debt for equity swap through a deed of company arrangement that ultimately resulted in equity control of Network Ten vesting in CBS.
- Risks and opportunities in public M&A
In Australia, a curious dichotomy appears to be emerging amongst listed entities. As a result of the hunt for yield by investors, the share price for listed entities with stable businesses, strong cash flows and generous dividend policies continues to steadily increase – irrespective of the business’ fundamentals.
By contrast, businesses with less stable balance sheets have been buffeted by the global market uncertainty, thus creating both difficulties and opportunities in public M&A transactions. Potential acquirers of solidly performing listed entities need to act quickly and decisively to avoid the ever-shrinking premium in a takeover price, while companies with struggling share prices should be reinvigorating defence strategies to protect themselves from opportunistic acquirers.
- Opportunities to refinance
With interest rates currently at record low levels in Australia, buyers with a healthy balance sheet (or those that have the foresight to anticipate potential debt funding) have a window of opportunity to improve their competitive position before credit markets invariably tighten.
Anticipating the need for debt finance and taking action in advance of an impending downturn could give acquirers an edge to build up a source of capital before that opportunity is lost. Similarly, now is the time to raise equity in an environment where investors are hungry for returns – pre-emptive capital raisings for acquisitions (or simply to improve a company’s capital position) should be on every business’ radar.
 See the Hon Josh Frydenberg MP address to the Business Council of Australia, Making our own luck – Australia’s productivity challenge, 26 August 2019.
Restructuring and Insolvency
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.