Mergers, Acquisitions, and Corporate Restructurings, 6th Edition

CHAPTER TWELVE12

Restructuring in Bankruptcy

AS NOTED, MERGER AND acquisition (M&A) volume tends to move with the ups and downs of the economy. When we have a strong economic expansion, the likelihood that we may have a merger wave is higher. For example, this was the case in both the fourth and fifth merger waves. When we have an economic downturn, M&A volume tends to decline. It is in such downturns that we tend to see more bankruptcies.

In an economic downturn, revenues often weaken while costs may be slower to decline. In addition, companies may have increased their debt levels during the expansion, which can leave them in a vulnerable position during a recession. In the years 2003–2007, corporate and household leverage rose to new heights. Many companies could not service their higher debt levels when the economy turned down in 2008, and we entered the Great Recession. The natural result of the combination of a slow economy and high leverage is increased bankruptcies.

In addition to being a drastic step that companies take when they become insolvent, bankruptcy can also 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 under U.S. law: Chapter ...