The Effect of Coronavirus on Mergers and Acquisition

Author: Devang Bhatia, Guru Gobind Singh Indraprastha University.

Abstract

The COVID-19 crisis is extraordinary in both its humanitarian and economic impact, but history suggests how M&A will play out. While the M&A market has contracted, companies that are making M&A moves typically outperform those that do not. Forward-thinking leaders need to act now to rebalance for risk and liquidity, while assessing opportunities for resilience and growth coming out of the downturn. The Coronavirus crisis has shaken all aspects of human life from their physical well-being to financial stability. These last 9 months since march has been very crucial for conglomerates and SMEs alike. The demand for consumer goods dropped severely triggering solvency challenges among business owners, the non-performing assets of banks sharply rose due to bad living conditions affecting the overall interest rates, and demand for oil fell significantly causing trouble with OPEC supply. We have recovered from economic crises and pandemics earlier as well but the consequences of Covid are still unfolding every day. Businesses are facing the dilemma of uncertainty in the economy, which right now is, more than ever. The consequences are also majorly felt in the Mergers and Acquisitions industry (M&A) as expansion potential is underpowered by the right to life. Companies are prioritizing investing in the well-being of their employees and adjusting to the new way of life than acquiring a new business.

Recent events in the M&A industry

The Mergers and Acquisition industry saw a huge downfall of operations due to lack of resources, protection costs of the workforce, and an overall chaos in the atmosphere. Pending M&A deals either came to a standstill or were abandoned by the buyer. VC giants Softbank terminated its $3 billion offer to WeWork. Xerox dropped a deal of $34 billion to HP as a result of delayed meetings and to cope with the losses suffered. Lifestyle brand Bed, Bath, and Beyond commenced legal proceedings towards Delaware in the case of a pending sale of one of its divisions worth $250 million. Hexcel and Woodward supply company disregarded its pending merger of $6.4 billion in respect to unforeseen challenges that might appear during the pandemic. ^[1]

New Due Diligence in M&A

The due diligence in M&A has significantly changed over these past months. The buyer and seller, both are more conscious of the activities and possess a comparatively lesser risk appetite after such a big blow in the economic activities. Some issues that arise in the M&A activities are:

In a newly created virtual work world, how should two parties get to thoroughly know each other’s business? What strategies should be implemented for a virtual assessment of work?
What is the seller’s cash flow position? Are they capable of withstanding the recent expenses?
How is the debt chart of the seller? Are the pandemic caused losses recoverable?
How is the workforce of both parties affected during the pandemic? Is there enough remaining to sustain the operations of the business?
Are the seller and buyer, both complying with the state and federal law around the pandemic and regarding mergers and acquisitions? For instance, according to the WARN(Worker adjustment and retraining notification) Act in the US, employers have to give a notice of 60 days before laying off any employees.
What are the healthcare costs that the company is bearing of its furloughed workforce?
How stable is the condition of the seller’s key buyers?

The implication of new due diligence

Increased negotiation period:

All these additional worries and checks lead to an overall increased negotiation period. The fact that every board meeting has to be conducted virtually makes it difficult in obtaining third party permissions from landlords, customers, and intellectual property licensors. The department of Justice has also issued an agreement stating that the companies involved in pending mergers and acquisitions may add 30 days to their deal timing in order to comply with all the pandemic regulations.^[2]

More compelling dealmaking:

Buyers are comparatively more cautious these days as the risk appetite has plunged to a great extent. Thus sellers need to come up with a more compelling pitch for the thought to action process.

Force Majeure(FM):

Force Majeure refers to the legal right to delay the execution of a contract in case of unforeseen circumstances, which is beyond the control of both parties involved. This is a loophole in an otherwise formed breach of contract.

The FM consists of clauses like the pause feature that enables to stop any operation until the Force Majeure activity is taken care of. Other clauses also specify the time post which a party could resume operations after giving a binding notice. ^[3]

Indemnity, Representation, or Warranties:

In the light of recent events, it is possible that certain R&W don’t hold legitimate anymore, The rules have been adjusted according to the new world function, and thus pre covid world warranties may not work. For instance, insurance is laid out to safeguard during emergencies and in times of vulnerabilities. However, with the Covid-19 situation, insurers amended their policy. In this time of distress, a large number of industries and businesses have bent their rules and charged R&Ws as not applicable anymore.

Silver Lining

Among the industries drawing in losses, it was witnessed that some sectors made remarkable growth and expansion during the pandemic. These include Fast-moving customer goods (FMCG), IT (virtual products and applications), and most importantly the pharma sector. In addition, a sea of start-ups emerged to comply with the pandemic stuck world and its needs.^[4]

Conclusion

The COVID-19 crisis demonstrates that agility is more essential than ever. Analytics capabilities help enable

companies to scan proactively for disruptors and opportunities, make real-time decisions, balance short and long-term actions, and achieve greater speed to value from M&A in an ongoing, uncertain environment.

Buyers who made merger and acquisition deals before the covid valuations would want to terminate or re-transact the cost price, keeping in mind the liability aspect. The sellers on the other hand would have to make more compelling pitches as they seek to close the deals.

The road ahead demands provisions related to indemnity, the sustainability of businesses allowing acquisition of capital, and insurance for the R&Ws.

^[1]https://www.forbes.com/sites/allbusiness/2020/04/17/impact-of-coronavirus-crisis-on-mergers-and-acquisitions/?sh=56a76b70200a.

^[2] http://www.businessworld.in/article/Impact-of-COVID-19-on-Mergers-and-Acquisitions/21-07-2020-299574/

^[3] https://www.lexology.com/library/detail.aspx?g=20b79fe2-10e4-4138-9c02-a99f2594f443

^[4]https://www.accenture.com/_acnmedia/PDF-122/Accenture-COVID-19-Rebalance-for-Resilience-Mergers-and-Acquisitions.pdf