Mergers and Acquisitions amid COVID-19 – Challenges and Opportunities

The key drivers of Mergers & Aquisitions have undergone considerable change due to Covid-19 in terms of business outlook, concerns regarding valuation, liquidity crunch due to the working capital cycle, or reduced lending by banks. The Cross-border transactions have been severely impacted due to the lockdown and closure of international borders. In some sectors like aviation, hospitality, entertainment, and tourism, where there has been a direct business impact, the investor may think to exit or cancel the deals amidst long-term uncertainties. In other sectors such as consumer goods, manufacturing, etc., where the impact is less severe, buyers may reconsider valuations or seek downward price adjustments. Sectors like Video gaming, E-commerce, Pharma & Insurance which look exceedingly attractive offers a lot of opportunities In this article, we throw some light on the M&A landscape especially with regard to challenges and opportunities in M&A deals.

A. Challenges for M&A deals in the pipeline and concluded deals

M&A deals in the pipeline The office lockdowns and travel restrictions have been slowing the due diligence process or even led to the postponement or cancellation of deals for reason that is due to valuations not being attractive (EBITA multiple of turnover based multiple agreed may change), our business model not relevant or the structuring of M&A transaction requiring major re-visit due to the difficulties in execution of the transaction. M&A deals through a Court merger maybe even more challenging than a simple transfer of shares or asset transfer. The possible solution could be a review in terms of restructuring of the transaction as something which was relevant 6 months may not be relevant now. For example, given the potential delays in obtaining regulatory approvals, parties may prefer structures involving the least regulatory interface- share acquisition may be preferred over a court-approved or slump sale even though it may not be tax efficient. Similarly, the due diligence process may also require a change – rely less on physical meetings and site visits, and more on virtual data rooms and e-verification. Concluded M&A deals The Covid-19 situation has brought about unforeseen circumstances preventing the other party to fulfill the terms of Contract. This is an exception of what would otherwise translate into a breach of contract ( Referred to as “Force Majeure” of FM). The parties would need a careful review the FM clause of the executed contract to figure out whether the terms of FM covers this pandemic or not and further if FM clause is hit whether the contract provides some limited period of time after which either party can enforce the terms with compliance of notice etc. Similarly, the clauses on indemnities, representation, or warranties need careful look as some of the terms may have already hit or about to hit especially where the terms are linked with the performance indicator of the target company. The extraordinary situation also calls for review of call and put options given under the contract to safeguard against future losses.

B. Opportunities/Future M&A deals

Despite the harsh outlook, there are certainly some buy-side opportunities, leveraging on the lower valuations in the short term to seek a higher return on capital in the long term. On the other hand, for the sell-side, a business may escape forced liquidation or insolvency buy resorting to cross border investment or funding through a suitable investment instrument or loan syndication as may be appropriate. Next Steps We, at MBG Corporate Services, have an in-depth understanding and a strong team that can help in navigating Risks and Understanding Opportunities through this difficult and challenging time. Please connect with us if you would like to discuss the next steps. Last Updated: 12th May 2020 This article is contributed by: Manoj Pandey Partner, International Taxes  

Tag: M&A