Depending on the situation, the company may not be able to raise enough liquidity to implement the turnaround plan under the existing credit lines and debt documents, and as a result, it may seek additional funds by disposing of certain assets, starting with non-core assets, which could even include the company's crown jewels if need be. Or seeking additional equity financing from existing or new shareholders. Or lastly, selling the company outright.
These processes can take time and usually a company in distress can't afford to wait. Running an accelerated M&A, AMA process is generally what is done as this minimizes the time needed to get a deal done. AnAMA process is similar to a mainstream M&A, but with a much more compressed timeframe. It can take around six weeks, whereas a normal M&A process can run for many months. The limited due diligence afforded by the shorter time horizon and increased riskiness of a deal involving distressed assets is commonly reflected in the bids received. Bidders will want a discount against normalized valuations. The account for the increased risk they're taking, typically precedence is given to a bidder that can deliver on a deal over a price being offered. When evaluating bids in an AMA process, for example, a potential buyer offering a 100% cash bid with no strings attached, such as limited representations and warranties, or additional due diligence required, and that buyer can prove it has the funds readily available, they would be preferable over another bidder that offers a higher price, but a higher level of conditions, or who wants to pay via a mixture of cash and shares.
Another consideration is understanding the position of current shareholders and their willingness to continue supporting the company, including with additional funding. Often existing shareholders want to avoid putting good money after bad, and they use the AMA process as a way to divest in part or in full from the company. Creditors can also be a key player here as they might agree to right size the capital structure by compromising part of their debt that is agreeing to a debt haircut. In exchange, they get an equity stake in the company. In other words, to do a debt to equity swap. Right sizing capital structure refers to the idea that there is an optimal mix of debt and equity, and that the company has found itself in difficulty to having too much debt financing.
