Mergers, Acquisitions, and Corporate Restructurings, Fourth Edition

Chapter 11. Restructuring in Bankruptcy

As noted, merger and acquisition (M&A) volume tends to move with the ups and downs of the economy. This was the case, for example, with both the fourth and fifth merger waves. As with the three prior merger waves, both the fourth and fifth waves ended with downturns in the economy and market. Such economic downturns tend to be associated with lower economic demand, which puts pressure on weaker companies. This pressure may be felt more by those companies that increased their financial leverage due to acquisitions. Thus there is a linkage between certain types of M&As and bankruptcy. However, we discuss bankruptcy for more reasons than just its linkage with M&A volume. This is because bankruptcy is much more than a transaction a company engages in when it is going out of business.

Bankruptcy can be a creative corporate finance tool. Reorganization through the bankruptcy process can in certain instances provide unique benefits that are unattainable through other means. This chapter explores the different forms of bankruptcy in the United States and discusses the circumstances in which a company would use either of the two broad forms of corporate bankruptcy that are available: Chapter 7 and Chapter 11. Chapter 7, liquidation, is appropriate for more severely distressed companies. Chapter 11, reorganization, however, is the more flexible corporate finance tool that allows companies to continue to operate while it explores other forms of restructuring. ...