Acquiring a Distressed Private Technology Company: A Beginner’s Guide
Acquiring a distressed private technology company presents unique opportunities and risks, and can be a complex undertaking. In this article, we will discuss key strategies and considerations for buyers engaging in the acquisition of a distressed private technology company, including finding distressed tech deals, selecting a structure for acquisition, due diligence issues, and additional key issues in the acquisition process.
Finding Distressed Tech Deals and Identifying Decision Makers
In sourcing potential targets, buyers can access distressed tech deals by purchasing debt and other claims from existing creditors. By transforming themselves into creditors armed with special rights, buyers can benefit from enhanced due diligence and implement special legal structures to complete an acquisition. In the distressed context, identifying the “real” decision makers can be more complex, with creditors playing a significant role in dictating terms. Buyers targeting companies with tiered debt structures and syndicated loans must navigate a web of liens, covenants, remedies, and intercreditor agreements to determine which creditor (or group of creditors) are needed to approve a deal.
Selecting a Structure for a Distressed Tech Company Acquisition
Distressed tech company acquisitions are often structured as a purchase of assets, rather than as a merger or equity purchase, to minimize the buyer’s assumption of unwanted liabilities of the seller. Deals can use traditional acquisition structures or creditor-driven structures outside of or through bankruptcy court (“out-of-court” versus “in-court”). Each structure carries different levels of deal expense, execution speed, and post-closing liability risk.
Due Diligence Issues in Distressed Acquisitions
In distressed tech company acquisitions, undertaking due diligence is still necessary but may need to be accelerated and limited. Key due diligence issues will include liabilities to be assumed, accounts payable, accounts receivables, asset conditions, employee turnover, pending litigation, key contracts, COVID-19 related legal risks, supply chain risks, intellectual property transfer, termination rights under contracts, and more.
Additional Key Issues in Distressed Tech Company Acquisitions
Once a structure has been selected and the parties are in execution mode, buyers should take ownership of a number of key issues in the sprint to closing. These include fiduciary duties, D&O insurance, transition services, fraudulent transfer issues, escrow or hold-back of a portion of the purchase price, third-party consents, regulatory hurdles, employee compensation, WARN Act compliance, and more.
Conclusion
Acquiring a distressed private technology company requires careful consideration and strategic planning to navigate complex legal, financial, and operational challenges. By understanding the unique opportunities and risks associated with these acquisitions, buyers can make informed decisions and effectively execute the acquisition process.
By Daniel Lopez, Richard Vernon Smith, Douglas S. Mintz, and Richard Harroch
For a comprehensive discussion of due diligence issues in mergers and acquisitions, see A Comprehensive Guide to Due Diligence Issues in Mergers and Acquisitions.
About the Authors:
Daniel Lopez is an M&A and corporate partner in the San Francisco office of Orrick, Herrington & Sutcliffe LLP. He advises private equity funds and private and public companies in the tech, life sciences and energy sectors on strategic transactions, including debt and equity investments, acquisitions and dispositions.
Richard V. Smith is a partner in the Silicon Valley and San Francisco offices of Orrick, Herrington & Sutcliffe LLP, and a member of its Global Mergers & Acquisitions and Private Equity Group. He specializes in the areas of mergers and acquisitions, corporate governance and activist and takeover defense.
Douglas Mintz is a restructuring partner in the Washington, D.C., office of Orrick, Herrington & Sutcliffe LLP. He has deep experience representing lenders, debtors and official and ad hoc committees.
Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a venture capital fund in the San Francisco area. His focus is on internet, digital media, and software companies, and he was the founder of several internet companies.
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