Around the world, businesses are emerging from various pauses and lockdowns, some in better shape than others. Many businesses continue to grow and prosper, and many likely are doing so through a merger or acquisition. Others are looking to merge into or be acquired by other businesses.
The M&A market was active before the COVID-19 pandemic shut down many operations. Many pending deals were put on hold, and “proceeding with caution” has become the overriding philosophy of the new M&A marketplace.
Increases in Bankruptcies and Restructurings
Many businesses were so severely affected by the COVID-19 pandemic that it is uncertain whether they will survive. This means an increase in the number of bankruptcies and restructurings is likely to rise. And many of those businesses will be attractive to companies able to pursue their strategic M&A goals. That alone will cause bargaining power to shift from the seller to the buyer, particularly in hard-hit industries such as retail, entertainment and travel. Even businesses in industries that have held their own or even grew during the pandemic, such as cloud computing and biotech, probably will find this to be true.
Changes in Deal Negotiations
Other more systemic changes, such as the prevalence of virtual meetings, will affect the nature of deal negotiations, at least in the near term. For a variety of reasons, in-person meetings will be more difficult, especially if the parties are not in the same geographic location. Although the business world grew more comfortable with virtual meeting platforms, engaging in delicate negotiations likely became more difficult and take longer to complete because the way people engage during these meetings is not as personal as we are used to.
Valuations will be difficult in this environment as well and that will affect due diligence examinations. Due diligence will take longer as buyers try to gauge the target company’s future viability. Some due diligence may be performed even before a letter of intent is signed. For example, consider some of the factors a buyer of commercial property will need to asses: Tenants may opt to reassess their need for a large physical space against the costs of a remote workforce. Retail tenants may not be able to reopen or may need a smaller footprint. And these are only two considerations. There are many others.
Differences in Levels or Risk
As negotiations proceed, each party will want to assume the least amount of risk possible, and the level of risk each party is assuming will be difficult to assess until the economy is further along in its recovery. Nevertheless, this is likely to affect many aspects of the deal, such as closing conditions. Sellers will want to negotiate favorable terms for pre-closing covenants, drop-dead dates, purchase price adjustment provisions, exclusivity periods and purchase price adjustment provisions, while buyers will want to use their leverage to dictate these provisions.
The dynamics of M&As definitely has changed, but the reasons for them are as real as they ever were: Buyers are in expansion mode and looking for good opportunities; sellers are looking for an exit strategy or a solution to a financial problem.
Deals made now will be different than those made before the COVID-19 pandemic. Nevertheless, buyers and sellers alike need to remember their goals as they make decisions about whether and how to move forward.