M&A Insights: Special Situations
CDI Global CEO Jeff Schmidt sat down for a conversation with Christian Saxenhammer, managing director of CDI Global Berlin and expert in M&A special situations. In Q4 of 2020, CDI Global’s Berlin-based partner firm, Saxenhammer & Co., was recognized as one of the top deal-producing firms in the DACH European region (comprised of Austria, Germany, and Switzerland).
Jeff: Congratulations on your success as you approach the one-year mark as part of our CDI Global family!
Q: Can you tell us a little bit about your background?
Christian: Thank you. We love being a part of the global community and resources offered by CDI Global to our clients. I’m a German native who started with studies in European business, and then moved from a management consulting firm into investment banking before opening my own M&A practice in 2006. Although we cover a broad range of M&A and capital raising, we have a special focus on special situations, or companies that have a story to tell.
Q: Could you tell us more about what special situations are?
Christian: There is usually a core issue with a company presenting a challenge, whether they are underperforming financially, have a lack of liquidity, shareholder difficulties, or a high dependency on just a few customers. The additional challenge of handling those company assets is how we define a special situation.
Q: From an advisor’s perspective, how does a special situation differ from a standard buy or sell side transaction?
Christian: Speed is a defining element. Special situations tend to move faster than standard M&A transactions. There is a need to bring more creativity to the table when proposing solutions to the investors such as drafting measures to increase profitability or resolving shareholder issues. These solutions would have to be implemented by the investors. Persistence is important because these assets aren’t selling as easily, so the advisor has to go the extra mile to market them successfully.
Jeff: It requires a combined skillset of a bank advisor and a strategic consultant.
Christian: Yes, or industry advisor. CDI Global has a tremendous network that facilitates this, providing the operational experience to understand and provide solutions.
Q: Usually there are multiple stakeholders involved. How do you work carefully to bring about a solution in that scenario to satisfy all of their expectations?
Christian: With M&A we often purely focus on the seller, but that is different in a special situation where you have bank finance partners, employees, and even customers like OEM suppliers that all play an important role in the process. It’s critical to effectively manage all of these parts. Potential conflicts between those interests can create additional challenges.
Q: Can you give some examples of special situations you’ve handled and what the creative approaches were?
Christian: There have been a wide range of cases. We just completed a transaction within 5 weeks, structured in that limited time frame with a hard deadline. It was a very precise investor approach with only 12 interested parties who signed non-disclosure agreements, and a binding offer required within the 5 weeks. This process is fairly typical for a special situation. Another example was a German men’s apparel manufacturer that was underperforming, and the shareholder was looking to sell. We identified a Chinese company that was had similar manufacturing facilities in China for sale. Adding those additional facilities to their assets gave them a competitive advantage when selling the company.
Jeff: At CDI Global we get a number of requests for support and identifying buyers, in some cases while under receivership, where you have very tight timeframes and a legal authority providing oversight for the process.
Q: Do you think cross-border situations are usually viable or does it take a unique set of circumstances, like with the Chinese manufacturing example, to get the traction needed to close?
Christian: When I look at our history about 90% were bought by strategic buyers, instead of higher M&A investment buyers. Foreign transactions are always at a disadvantage with a tight time frame. For example, looking at the automotive space in Europe where there is mainly interest from American or Chinese investors, we are a year and half deep into a Chinese deal. They run much slower.
Q: What other industries are likely to have a lot of special situations in the next few years?
Christian: The whole M&A market will be full of special situations for the next year or two. Highly profitable, or even companies in good shape, will delay selling for the next year or until the market recovers, so all the businesses currently up for sale are usually a special situation. They all have an issue to solve, and it can be challenging to find a good valuation.
Q: If a buyer with cash is looking to take advantage of a special situation, what should they keep in mind?
Christian: Hiring a local firm is key to get the local expertise needed to be successful. CDI Global is ideal for this because we have locations in markets across the globe, so we can provide expertise for lawyers, accountants, and legal frameworks needed to facilitate the transaction.
Q: Any other important considerations to mention for buyers entering into a special situation process?
Christian: Investors need to be pragmatic. Prices tend to be much lower, but it involves more risk. What you are buying might not be the status quo, and you don’t have the usual warranties you get with standard M&A transactions.
Q: How does a company cope with the travel limitations during COVID-19 while trying to do due diligence in a tight time frame?
Christian: The trend is that due diligence tends to be done electronically, reducing both cost and travel risks. There are fewer site visits, although still at least one. The rest is conducted remotely.
Jeff: Thank you for your time Christian, we appreciate your insights into special situations transactions, which are key in today’s marketplace.
Christian: Thank you for having me. We are happy to be part of the CDI Global network.