M & A Roundup – Washington Update: Bankruptcy Court Blessings for a Deal

As distressed companies are more frequently considered fair game for acquisition, buyers are increasingly reaching to the bankruptcy courts to get deals done. In at least four cases in recent months, troubled targets not yet in bankruptcy filed for Chapter 11 protection so that the transactions could be completed. While the incidence of such proceedings has been fairly high in 2000, bankruptcy attorney Neil Colton of Philadelphia-based Cozen & O’Con-nor said that the practice is neither new nor unusual. Rather, he remarked, a well-done bankruptcy that coincides with an acquisition agreement traditionally has offered a measure of comfort to both the acquirer and the target’s creditors. The buyer gets a court order that it can complete the sale and its payment goes into a court-supervised pool that ensures that creditors can get at least some compensation. The recent cases of contemporaneous acquisition agreements and bankruptcy filings by the target included: * Time Warner Telecom Inc.’s agreement to pay $450 million for the assets of GST Telecommunications Inc., which later was rescinded; * Meridian Automotive Systems Inc.’s $363 million acquisition of automotive plastics firm Cambridge Industries Inc.; * Jacobs Engineering Group Inc.’s $150 million purchase of the assets of Stone & Webster Inc., a construction and engineering firm; and * Fairbanks Capital Corp.’s purchase of the home equity loan service operations of ContiFinancial Corp. Colton noted that as a result of the filing, the bankruptcy court can be presented with “expert testimony” on the value of the assets being sold and the viability of the purchase price. “The court is in a position to very expeditiously rule on the sale motion,” he said. As a result, a pool of money, rather than the distressed operating business, is left for the creditors and “they can’t come after the buyer.” “Any buyer that is sophisticated will have this requirement,” Colton said. “The creditors of the seller who are sophisticated will support it. It results in more money being paid because the court order is an insurance policy that the money is available for paying them. The transaction is blessed.”