Hot New Arena for Takeovers Is Bankruptcy : Mergers: Opportunities like R.H. Macy & Co. arise as suitors deal with--or become--creditors of distressed companies.

Going after a company that’s under bankruptcy court protection--as Federated Department Stores is doing with R.H. Macy & Co.--isn’t buying on the cheap. Experts say it’s a complicated and costly way of doing a takeover, merger or acquisition, and one with significant risks.

Yet, merger and bankruptcy experts alike predict a steady and increasing stream of such acquisitions, including takeovers that appear at first blush to be unwanted--as in the Macy-Federated situation--or downright hostile.

Why bother with the added legal expense of dealing with a company in Chapter 11 bankruptcy protection, with potential long delays and a court system known to have little patience for hostile advances? The answer is simple: opportunity.

Bankruptcy Court is the place to find vulnerable companies these days, said Paul S. Aronzon, an attorney who heads the bankruptcy practice of Milbank, Tweed, Hadley & McCloy in Los Angeles. “So much of corporate America has been put in the position of having a bad balance sheet,” he said, “that this has become a natural arena to look for acquisitions.”

Many companies, he said, have been driven to seek Bankruptcy Court protection by the debt-based merger mania of the 1980s. Before that, an investor or company with money to spend probably wouldn’t have gone through the trouble that dealing with bankruptcy court poses. Now, companies in financial distress are too plentiful to ignore, Aronzon said.

Taking control of a company when it’s down on its luck is not new. Old Mr. Potter tried to do it to George Bailey’s Building & Loan in “It’s a Wonderful Life,” and scions J.P. Morgan and John D. Rockefeller actually succeeded in building their empires on the backs of others’ misfortunes.

But within the setting of the modern day Bankruptcy Court, such takeovers are just beginning to blossom. Mainly because of creditors, the group whose interests generally must be satisfied first in Bankruptcy Court procedures.

Some creditors become anxious when a company languishes in bankruptcy without developing a plan of reorganization and emerging from court protection. In such cases, it often is easy for those with takeover intentions to buy up the debt at a deep discount and gain standing with the court. Although it is not easy, said bankruptcy experts, creditors groups can now petition the court to end the bankrupt company’s exclusive right to develop a reorganization plan and can propose one of their own--one that could favor an outside suitor.

At nearly two years, Macy’s bankruptcy is “a little long in the tooth,” said Jeffrey Chanin, president of Chanin & Co., a bankruptcy investment banking firm with offices in Los Angeles and Westport, Conn. “It’s a complex, large (case) and as it starts pushing past two years, people . . . want a solution, their patience starts running out.”

Still, other creditors are becoming more sophisticated and are able to use the bankruptcy laws to their advantage, said Ron Orr, a partner at the Los Angeles firm of Gibson, Dunn & Crutcher and head of its bankruptcy practice. Often, creditor groups may encourage competition for control of a bankrupt company, knowing that heightened bidding could raise the amount they get back on their debts.

Takeovers in bankruptcy, said Orr, could become a vital creditors’ tool. “If Federated proceeds and looks like it has a possibility of winning, the Macy’s management may try to cut a deal. Or, if Federated goes forward and succeeds, creditors in the future could threaten ‘to do a Federated’ ” on other companies, he said.

Federated, owner of Bloomingdale’s and several department store chains--and a chief competitor of Macy’s in many Eastern cities--purchased $449.3 million of Macy’s debt from Prudential Insurance Co. of America and has an option on an equal amount. Owning some of Macy’s $6 billion in debt essentially makes Federated an owner of Macy, but more importantly, gives it an opportunity to participate in structuring and approving its reorganization plan.

Macy so far has received Federated’s interest coolly, as it previously has rebuffed other potential suitors.

Anyone considering an unwanted takeover of a company in bankruptcy has to be concerned about how negatively its attentions are perceived by the court. Bankruptcy judges have in the past have refused to allow some debt-buying prospective acquirers to participate in the reorganization process, questioning the good faith of the interloper’s motives.

On the other hand, a seemingly hostile takeover can become friendly, if enough of the creditors come to favor the takeover terms. Such was the case in the reorganization of the Revco discount drug store chain, in which creditors ultimately sided with a group led by investor Sam Zell. The Zell Chilmark Fund also took over department store operators Carter Hawley Hale when it emerged from bankruptcy in late 1992, in a deal that was well received by Carter Hawley’s management.

Despite the pitfalls, takeovers in bankruptcy will increasingly become a viable option, some attorneys said, for acquiring companies without the consent of management. Among the advantages is the general notion that it’s easier to appeal to creditors than shareholders who were the focal point of takeover wars in the 1980s.

Also, potential suitors have an easier time getting a good look at a bankrupt company’s innermost details, because of the extensive supportive documents a company seeking Chapter 11 protection must provide.

But it’s for that very reason that James McTevia, a Detroit area consultant in business restructurings and bankruptcies, believes companies will try harder to restructure its finances without resorting to bankruptcy--and risking a hostile takeover.