Special Situations M&A / Distressed M&A thoughts?

What are people's thoughts on joining a Special Situations M&A / Distressed M&A team at Banks / Boutiques? The current global environment is heading towards a recession and good book M&A activity is likely to reduce so I was wondering what people think of joining a company like Alvarez and Marsal, Teneo, FTI Consulting given the current environment? 

 

I’m not sure if your question is clear? Like are you asking whether you should join those firms or do nothing at all? What are the options you are comparing to? Markets go up and down. If you are making a short-term investment in terms of where you will see the most deal flow over the next few months, yea maybe it’ll be in restructuring / distressed m&a but who really knows or can predict things like that. Probably better to figure out if you want to do that for a few years at least or over an entire career

 

I think I am just trying to understand that given the current market environment with good book M&A deal flow slowing (and potentially lower bonuses), is it worth moving to a shop that does special situations M&A as deal flow in that area will be high in the next few years (equating to higher bonuses, potentially)? There is always an opportunity to move back into good book M&A after doing a few years in special situations. 

 

Idk it’s hard to predict. During Covid / 2020/2021 regular way m&a teams seemed to have done very well. I’m not sure if anyone predicted that. The best is probably to find something that you are good at and like and can do for a longer term career. The major paydays are later on, better to set yourself up for a good future I would think than just an extra few thousand dollars in your early career

 

Honestly, what's the point of working in distressed M&A--it's almost an oxymoron? Also, don't the restructuring advisors also do m&a analysis--seems unlikely they'd hire a separate bank to advise them on m&a when they've already retained a restructuring advisor especially since they're budget constrained?

From a practical standpoint, distressed m&a seems very impractical because distressed companies have already lost a ton of value, and you're usually dealing with mm or lmm companies that are financially strapped, so how are they going to be willing to pay high fees for m&a advisers?

On the other hand, if you work in traditional (non-distressed) M&A, companies are usually buying and selling in order to expand, so they're less sensitive to deal fees they pay to advisers

 
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I don't think you understand the dynamics within distressed M&A. I'm not going to dive into much detail other than highlighting a few points:

  • Restructuring Advisors focus on stabilizing the business and re-positioning it for growth (you can pretty much consider them management consultants). They also work through bankruptcy/liquidation matters
  • Restructuring IB entails working through a capital restructuring of the business or sale of the business. In the case of a sale, they are focused on maximizing the recovery to all the stakeholders vs. the existing owners. Proceeds from the sale of a distressed business will go towards paying off the creditors based on their status of priority in a waterfall (with equity holders being last in line and commonly receive little to nothing). It could also be a large and growing corporation looking to divest one of its unprofitable business units that has been burning cash flow for the entire business. In these cases, I wouldn't consider their budget to be constrained..... 
    • Secured lenders are the ones typically pushing for the sale of the business
  • From a practical standpoint, companies that have lost a ton of value are a goldmine target for turnaround PE shops to swoop in and buy a business at a considerable discount (no different than buying the dip on a stock or buying a fixer-upper house, renovating it and flipping it for a quick profit).
  • In most instances, the demise of a business is the direct result of poor management, fraud or taking on more debt than they can sustainably service. The business itself may yield significant value under different ownership with an appropriate recapitalization. It may also fit nicely as a strategic investment by a direct competitor. 
  • Investment banking fees are still very lucrative and there are large-scale bankruptcies every year.  
 

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