The New M&A?

Back in the days when government-imposed ceilings on interest rates prevailed, the term “3-6-3” made fun of the simplicity of the banking world. Wags joked that all your local banker need do was pay 3 percent on the bank’s deposits, loan them out at 6 percent, and be out on the golf course by 3 p.m.

Today, 363 sales have acquired a new meaning—one that is no joking matter. It refers to a section of the U.S. bankruptcy code that governs the process of selling companies out of Chapter 11 bankruptcies. Over the past year or so, 363s have become one of the most active drivers of the mergers and acquisitions business. It may not be much of an exaggeration to say that the mergers and acquisitions business, laid low by a serious recession, would be approaching a dead zone this year but for 363s.

Just ask folks at the Dorsey & Whitney law firm in Minneapolis. Last year, Dorsey ranked as the third most active U.S. law firm by number of M&A deals in which it was a legal advisor, according to Thomson Reuters. But overall, the number of advised M&A deals industry-wide fell 18 percent in 2008 and is dropping more rapidly now. Dorsey partner Matthew Knopf thinks the decline could have been around 50 percent in this year’s first quarter. He suggests it would be even worse without the boom in acquisitions of companies in distress, many of them sold via the 363 process.

Dorsey advised the winning bidders in the seesaw saga that became a particularly high-profile 363 sale: the auction of Minnetonka-based Polaroid this spring at the U.S. Bankruptcy Court in St. Paul.

What’s Driving the Boom?

For sellers, the 363 process is a way to get financing, which has dried up these days. And opting for a 363 typically means a firm can get out of bankruptcy more quickly. In a 363 sale, buyers can choose the assets they want, often at a bargain price, through an auction process that is usually less tedious than a traditional Chapter 11 reorganization. Both buyers and sellers can benefit in the end, because the court issues an order transferring debtors’ assets free and clear of all liabilities, claims, and encumbrances.

The 363 boom is being fed by the travails of business. As the recession grinds on, the Chapter 11s are piling up. “I look at the headlines every day and there’s just tons of stuff on 363s and distressed M&A,” says Mark Kalla, one of the Dorsey attorneys representing the winning bidder in the Polaroid auction.

Section 363 has been around since the U.S. bankruptcy code came into being in 1978. It wasn’t used much at first, because some judges thought 363s short-circuited the bankruptcy process. Kalla says that, gradually, precedent and necessity prevailed as the courts became persuaded that the 363s could help creditors realize more value.