M&A with public counterparty should be treated as distressed M&A

Merger and Acquisition transactions - M&A generally aim to consolidate, expand, or improve the market competitiveness of a given company, involving the partial or full sale of the company to a third party or the merger of different organizations to form new businesses. Distressed M&A, in turn, involve companies in a delicate financial situation, with high debt, low liquidity and/or decline in operations, in which the main objective is to restructure or revitalize the company in difficulties.

Naturally, a distressed M&A tends to involve a valuation below comparable multiples, which can represent fertile ground for investments; but intrinsically, these transactions carry greater complexity and risk of failure. For no other reason, betting on distressed assets requires careful analysis, knowledge of the business and differentiated due diligence.

Those involved in traditional M&A generally seek growth and better positioning in the market, therefore demanding an asset investigation process (due diligence) focused on discovering efficiencies and appreciation. In distressed M&A, which deals with companies in crisis with the aim of reversing their capital situation, due diligence tends to focus more on identifying problems, assessing risks and mapping paths to recover the business. And all of this must be considered at the fair price that each party involved will be willing to accept. Once the parties are comfortable with the pricing, the deal will happen.

In turn, M&A transactions, distressed or not, that involve, even tangentially, a public counterparty, create additional challenges. In addition to adhering to all administrative law requirements typical of public authorities (bureaucratic approval rules, request for transparency and accountability), an additional broad and abstract variable - “public interest” - will need to be considered in convincing the parties.

M&As with a public counterpart in the position of partner or creditor (or even that involve assets linked to public services) bring additional uncertainty into the negotiation process that often does not follow the strictly financial logic that a market deals between private parties usually follows.

In a negotiation exclusively with private parties, no matter how stressed the asset, the parties will tend to maximize their financial position: the buyer paying as little as possible and minimizing the risk of failure of the future deal; the seller seeking to increase their receivables and to transfer personal liabilibilities for the asset sold. There is an eminently financial logic at the end of the lines: to seek, given the risk on each side, the most advantageous proposal possible financially wise.

On the other hand, when entering the world of negotiations with public counterparties, the concern of achieving the best financial result (the greatest economic benefit or the least loss) begins to be weighed together with variables such as impersonality, broad competition, continuity of services, national security, and benefits to citizens. Obviously, demonstrating the financial advantages for the authorities will also be required, but it will not be the only convincing demand in the case.

An M&A with a public counterpart requires sensitivity to social, political and regulatory issues, as well as a strategic approach that convinces those involved about the benefits for society as a whole. Disregarding such risks is dangerous and could result in the failure of an entire complex transaction. Not to mention the possible political implications, the public opinion and the involvement of different regulators that could interfere in the closing of such deals.

M&As with a public counterparty are, in essence, like distressed M&As, transactions where risk and reward go hand in hand, and good professional guidance is essential. Investing in more robust due diligence that attempts to map solutions and quantify the “public interest” variable side by side, both from a financial point of view and from the point of view of benefits to citizens, could be the key to the success of the transaction.

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L&S Authors

Saulo Benigno Puttini

Saulo Benigno Puttini


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