Distressed Mergers and Acquisitions: Price Adjustment Mechanisms in the Context of Distress

Abstract

In crisis contexts, distressed Mergers and Acquisitions (M&A) arise as viable options for companies under severe financial pressure seeking to avoid bankruptcy. However, distressed M&A transactions are accompanied by multiple complexities that turn the process of merging or acquiring a financially distressed company or asset into a risk-driven business activity. The impossibility to conduct a thorough due diligence due to pressing time constraints, the lack of extensive warranty and indemnity protection, and the impact of these two factors on the target’s valuation, constitute core features of distressed M&A transactions. Circumstances that can be addressed by means of opting for the appropriate pricing mechanism that best adjusts to the characteristics of the deal. However, the available pricing mechanisms might not suffice per se. Therefore, parties should consider the inclusion of additional contractual resources to mitigate the identified risks and challenges. Otherwise, instead of reducing the risk exposure from a distressed target, a failed M&A that does not properly address the particularities that come along with doing business in contexts of distress might consequently put the acquirer under great pressure. Corporate Governance, Corporate Social Responsibility, CSR, Directors’ Duties, Equator Principles, ESG, Greenwashing, Risk Management, SDG, Sustainable Banking, Sustainability Reporting