Dealmaking appetite reflects a new post-COVID reality

COVID-19 RESOURCE HUB  |  Financier Worldwide

MERGERS & ACQUISITIONS

COVID-19 has already had a significant impact on global M&A activity. Given the dynamic and fluid state of the crisis, both buyers and sellers have been considering their options over these past few months.

The crisis has forced companies to reconsider whether this is the right time to be involved in a complex, expensive transactions. It has taken a toll on virtually every aspect of M&A transactions, from preparing a company for sale, to due diligence, financing and regulatory approval.

Despite the uncertainty surrounding the early stages of the outbreak, for many parties M&A activity continued largely as normal in Q1 2020. The market remained relatively strong and transactions were fuelled by high equity prices and buoyant financing conditions. Some market participants may also have underestimated the outbreak, at least initially, likening its impact to SARS or MERS, both of which caused a minor fall followed by a rapid recovery.

However, as we moved into Q2 it became clear that the global economy could be heading for a deep recession.

Going forward, appetites for dealmaking will likely reflect the new post-COVID reality. Deterioration of capital markets and the real economy over the last three months portents poorly. Many previously announced deals have already been cancelled or amid financial difficulty and problematic contract negotiations.

For transactions that are moving ahead, regulatory approvals could take longer to obtain. This will lengthen the period during which the seller has to operate as normal, which may afford the buyer the chance to the terminate the deal due to a material adverse change (MAC). In the event of a delay, both buyers and sellers may consider extending the long-stop date, depending on the circumstances.

Current volatility may also make it more difficult for buyers to obtain financing on attractive terms. Though financing has been abundant in recent years, this is unlikely post-COVID-19. Sellers should therefore consider how a buyer is funding the deal.

Additionally, buyers’ ability to carry out due diligence will be more difficult due to social distancing measures and travel restrictions.

Despite the uncertainty, opportunities will be available in the coming months, however.

The economic boom of the last decade has allowed many companies to build healthy balance sheets. In addition, a record level of ‘dry powder’ has accumulated in the private equity industry. With valuations set to decline in the coming months, acquirers will be able to pursue underperforming assets at attractive prices. Distressed M&A activity is also expected to rise.

The outlook for dealmaking today is very different compared to just a few months ago. Companies are no longer operating in a sellers’ market and buyers are likely to dictate negotiations going forward.

In many respects, however, we are in unchartered waters. It remains to be seen exactly how the COVID-19 crisis will change the M&A industry, but buyers or sellers will need to quickly adapt to a new normal.

© Financier Worldwide

BY

Richard Summerfield