The automotive and automotive supply industries are facing an unusual period of instability and economic difficulties. Major industry players as well as niche producers are confronted with declining sales and a slide in profits, which have already resulted in announcements of plans to downscale both capital expenditure and the creation of additional places of employment at a number of companies – with that number growing steadily. At a time when most major original equipment manufacturers (OEMs) are seeing the number of cars, trucks and buses actually sold dwindle away, mergers and acquisitions (M&A) in the industry have become a challenging task – even though it is still possible to get deals done. Even more difficult than getting a deal through with one or both parties in economic turmoil is doing deals when one player’s business has already failed and its operations have been put into administration and are being run by an insolvency administrator.
For deals in the German automotive supply industry, buying into or being bought out of an insolvency is not a new situation. There are a number of examples of such deals, including, in the not-so-recent past, Kiekert, the Peguform Group and the ISE Group. Still, the challenges of such deals are manifold. Doing the deal quickly is absolutely key to dealing with an automotive supply business in administration. Even though suppliers in a distress situation are generally supported – financially and otherwise – by the OEMs they produce for, working efficiently with restricted cash resources is the first priority. Another priority, and potentially one that is even more difficult to cope with in the medium to long run, is the availability of qualified personnel, because key employees – in research and development (R&D) and the finance department, and to a lesser degree in production and general administration – tend to be on the lookout for more secure jobs once it becomes clear that their employer will not emerge quickly from administration. It is therefore always an administrator’s intention – once the business has been stabilised after the initial blow of having to file for insolvency and after having sorted out the key administrative and legal issues for a sale – to do a deal as fast as possible without giving away too much value, to keep the insolvent company’s operations afloat and to avoid its (otherwise unavoidable) deterioration and eventual collapse. As automotive supply businesses make a living from being awarded new or replacement jobs from the OEMs every year, and as the OEMs will at the very least be reluctant to keep an insolvent business on their preferred supplier lists for long, an insolvency administration in this industry cannot be dragging on for many years.
M&A deals with insolvency administrators therefore also tend to be very simple and straightforward. They are – with the possible exception of those involving foreign subsidiaries of the insolvent company – generally structured as asset deals and thus allow the buyer to leave behind (unknown) risk exposures attaching to the old body corporate. Still, some degree of due diligence on the assets to be acquired is unavoidable, on the one side for the buyer to understand fully the business and (financial and income generation) status of the insolvent operations, and on the other side because representations and warranties are generally absent in the acquisition documentation to be entered into with the administrator.
The extreme reluctance of an administrator to accept any contractual or other liability over the business sold out of the administration arises primarily from his obligation to present to the creditors’ committee of the insolvent company one or more clear options for the sale of the business. In particular, he has to help the committee calculate precisely the proceeds that the insolvent estate would make from the sale. Any kind of substantial guarantee given by the administrator on behalf of the estate would make it very difficult to achieve this aim. Also, the administrator has a strong tendency to keep the contract documentation that is negotiated with the various bidders as close to identical as possible – because otherwise the offers would not be easily comparable for the creditors’ committee and the administrator would be forced to explain at great length why a certain provision, which is potentially unfavourable to the estate, was agreed with one bidder and not with the others. The legal teams involved therefore generally focus on fully understanding each others’ positions and streamlining the legal documentation in such a way that it works technically for both sides and, in particular, tackles special situations – such as customer-financed equipment or research products – if necessary. However, they do not generally spend a lot of time discussing risksharing mechanisms, because the administrator cannot in any case take on substantial risks.
Another key element for a successful transaction with an insolvent automotive supply business is, usually, support for the deal from trade unions and local employee representatives (including the works councils at the various plants). In particular, if a downsizing of the workforce is planned or if some of the employees would have to accept wage and benefit reductions or redeployment or requalification in an ‘employment and qualification company’ (Beschäftigungs- und Qualifizierungsgesellschaft or BQG) run by the trade union and placed outside the new business, a negative attitude towards the buyer’s plans or, even worse, industrial action against it, could destroy or significantly delay even the most promising project. A potential buyer is therefore well advised to contact regional and local works counsel and union representatives early in the transaction – a move that is generally seen positively and, if possible, is supported by the administrator and its team. Support from the employees’ representative organisation/s can be helpful to establish the necessary contacts.
Finally, getting the OEMs to support or to continue to support the emergence from administration and the fresh start of the now ‘formerly insolvent’ company’s business is also very important. The OEMs are usually not unwilling to lend some – temporary – support to their suppliers, again financially as well as otherwise, especially the single-source suppliers. They tend to be much more flexible in their approach than the administrator and their votes weigh heavily with the creditors’ committee, which in the end has to approve any deal negotiated by the administrator. Still, co-ordination between them can be a problem (not least from an antitrust perspective), so agreements with them very often have to be negotiated separately – but, not so surprisingly, not often with widely varying terms.
All in all, M&A deals having the business of an insolvent automotive supplier as the target tend to be tougher than most in corporate transactions – but at the same time require a huge insight into the industry and what makes it stand out from so many other businesses around the world. They can, however, as a number of transactions sealed in recent years have proved, be very attractive for the buyer and a good solution for all other stakeholders, including the employees and the OEMs.