Prior to the emergence of the coronavirus (COVID-19) pandemic and its devastating impact on virtually sphere of business activity, the global M&A market, while always an uncertain environment, was on a high at the end of 2019 – the close of a decade-long boom in mergers and acquisitions (M&A), marked by some of the largest transactions in history.
Testifying to this is analysis by Refinitiv, which reveals that in 2019 deal volume and value was indeed substantial. This was largely driven by a booming US market (15 of the top 20 M&A deals involved all-US players), as well as a wave of ‘super mega-deals’, each valued at over $10bn, which helped offset a broad decline in smaller domestic deals. A surge in transactions in the final quarter drove the value of takeovers worldwide to $3.9 trillion.
However, since the pandemic truly began to bite, global M&A has essentially dropped off a cliff. According to research by Mergermarket, the initial effects of COVID-19 began to be felt across the global economy at the end of Q1 2020, with its full impact manifesting in the second quarter.
In its ‘Global and Regional M&A Report 1H20’, Mergermarket states that only 2630 deals made it over the line between April and the end of June, compared to 4308 in the first quarter – a fall that caused deal volumes to slump by a third in the first half of the year compared to the same period in 2019, while deal values dropped by more than half to $901.6bn.
Furthermore, the extent of the drop in M&A deal activity in recent months is such that levels are now lower than during the 2008 global financial crisis. “Such activity levels were most evocative of 2008 and 2009,” says Mark Druskoff, data-driven content coordinator at Mergermarket. “And while the global financial crisis remains the best historical comparison, COVID-19 has generated its own unique brand of mayhem.”
Mergermarket’s analysis also notes that although the pandemic is a worldwide phenomenon, its impact on M&A activity has been uneven across regions. “In China, where the virus was first identified, deal count only fell by 7 percent compared to the same period in 2019, while deal values fell by a fifth,” explains Mr Druskoff. “The hardest hit region was the Americas, led by the US. The region’s overall share of global M&A activity by deal value dropped to 33 percent in the first six months of the year, compared to an almost 53 percent share at the same point in the calendar in 2019.”
That said, there are indications that the pandemic’s subjugation of M&A is not for the long term. “China experienced the earliest onset of – and recovery from – the virus, providing a hopeful note that as other countries and regions recover, they too will show an improving deal environment,” adds Mr Druskoff. “Resurgences of COVID-19 could constrain the upside, however.”
So, with deal flow having slowed considerably, what does this mean for dealmakers and the strategies they and their financial advisers need to deploy to secure the M&A opportunities that are available? Certainly, the pandemic is having and will continue to have, a significant impact on deal terms, the manner in which due diligence is conducted, the availability, pricing and other terms of deal financing, and the time it will take to obtain necessary regulatory and other third-party approvals.
“Unlike in past crises that have affected M&A deals and activity, COVID-19 has disrupted the manner in which M&A transactions are developed and negotiated,” affirms Richard Harroch, managing director and global head of M&A at VantagePoint Capital Partners. “The effective use of new and creative collaborative tools, technologies and techniques have become more critical as buyers, sellers, providers of M&A financing – and all of their respective legal and financial advisers – adjust to the changed environment.”
Drilling down, one of the key impacts of COVID-19 on M&A dealmaking relates to material adverse change (MAC) clauses. This provision, in the context of an transaction, gives a purchaser the right to terminate if, between signing and completion, an event or development occurs that has, or is expected to have, a materially adverse effect on the target company.
“MAC provisions are typically generic and designed to cater for unknown rather than known risks, or – less common – tailored clauses which define specific MAC events to cover the purchaser’s key concerns, such as a significant reduction in sales, loss or insolvency of key customers or suppliers,” explains Henk Arnold Sijnja, a partner at DLA Piper. “Another variation of a MAC provision is where a purchaser has the right to terminate in case of a material breach of warranty between signing and completion, generally construed as a condition. Sellers need to be wary of such ‘backdoor’ MAC provisions, as it effectively could provide a purchaser with a MAC get out, especially given the current COVID-19 circumstances.”
In Mr Harroch’s view, factors such as MAC usage, as well as many others, are likely to continue to impact the M&A world for some time to come, influencing how buyers and sellers adjust to the changed circumstances and the extent to which they can minimise their exposure to the business risks resulting from the pandemic.
Less certain is Steven Tran, a partner at Mayer Brown. “It is difficult to say with certainty whether the present pandemic will have any lasting effects on the approach parties adopt in future M&A transactions and the impact on dealmaking more broadly, particularly as the situation continues to evolve on an almost daily basis,” he says. “However, given the speed and frightening ease with which COVID-19 has impacted businesses, the economy and life in general across the globe, M&A dealmakers are poignantly reminded of how quickly things can change as a result of events beyond their control.”
With the ongoing effects and legacy of COVID-19 resulting in a M&A marketplace that is unlikely to ever be ‘normal’ again, dealmakers must prepare for a new reality by developing strategies and investment opportunities amid the COVID-19 experience to drive future success.
© Financier Worldwide
BY
Fraser Tennant