Coronavirus: Dealmaker or Deal-Breaker?

In short: 
  • M&A deals are considerably hurt by the ongoing Covid-19 pandemic, with multiple deals being canceled or renegotiated.
  • The pandemic has a far-reaching impact on various apects of the deal-making process such as the timing, the due diligence process and the availability of debt.
  • Both buyers and sellers should adapt themselves to the new challenges posed by this crisis.

As the raging Coronavirus pandemic continues to unfold across the globe, we have now ended up with our backs against the wall. The rapidly evolving global consequences of COVID-19 are being experienced throughout society. Not only the healthcare system and the economy have taken a hit, but the disease has also affected politics, employment and corporate transactions. In fact, with our own life on hold, important business deals like mergers and acquisitions have also been put on hold. An important number of M&A deals has either been renegotiated or simply been canceled: all around the world, firms are getting cold feet. Semi-annual research on the developments of the global M&A market by KPMG shows, indeed, a significant impact of the ongoing crisis. They report a significant decrease in global monthly deal volume of 45% between December 2019 and June 2020. It is surprising to note that not all sectors have been affected as strongly. The number of telecom deals has actually increased during the period of outbreak, as opposed to deals in the leisure sector, which plummeted the most. This can, of course, be explained by the fact that the world and the economy have accelerated their reliance on telecommunication as a new way of working and interacting together.

An important number of M&A deals has either been renegotiated or simply been canceled: all around the world, firms are getting cold feet.

Besides the impact on M&A deal activity, the virus has affected a multitude of other factors in M&A deals. These include the timing and delay in M&A deals, the availability of debt financing to fund acquisitions and new due diligence issues that have arisen. These factors set the recent crisis apart from past financial and economic crises such as the dot-com bubble in 2000-2002 and the Great Recession of 2007-2009. Where in the past, uncertainties in the business and capital markets would affect the financial system in general, they have now a more far-reaching impact on the deal-making process itself.

Now that we know we’re facing a crisis that is nothing like past ones, let’s look at the factors that make it so different: the timing and delay in M&A deals, the emergence of new due diligence issues and the availability of debt. The completion of M&A deals will take much longer than usual because of delays in almost every stage of a typical transaction, from the preliminary discussions, to the negotiations and finally to the closure of the deal. This holds for deals that existed before the pandemic, but also for those that were entered during this period. First and foremost, working remotely complicates the negotiation process tremendously. It is literally not possible anymore to “get everyone in the same room’’ and agree on a deal, due to which negotiations take much longer. Third party consents, regulatory approval and debt financing will also take longer to obtain, as will the due diligence process due to newly emerging issues.

Because of these new problems, acquirers will have to undertake additional due diligence in order to evaluate the impact of the Coronavirus on the seller’s business. An example of an issue to consider in this new environment is the impact on the seller’s business if key employees or managers pass away from the disease. Furthermore, the costs incurred by the seller in order to provide extra healthcare benefits to sick and furloughed workers should be assessed. Also, in this world where physical contact is about impossible, what can buyers do to get comfortable with the seller’s management and key employees? And how do they get to know the business which they plan to acquire without an actual visit or inspection? Not to mention the financial impact of the pandemic on the target’s financial health and projections.

The pandemic is clearly costly to the seller, but buyers dependent on third party debt financing are also up against it. With the pandemic creating a lot of volatility and uncertainty in the debt market, the availability and the terms on which funds can be obtained are harmed. Some factors to consider are lenders becoming more risk-averse for acquisitions of firms that are in industries particularly hit by the virus and lenders that might increase their prices, or tighten loan covenants due to the additional risk brought about by the virus. All-in-all, lenders will become more cautious when it comes to providing their precious money.

Whether the coronavirus is a dealmaker or a deal-breaker in M&A deals remains largely dependent on the nature of the industry. What is certain for all M&A deals, however, is that the pandemic will continue to influence this world for some time to come, and both buyers and sellers should adapt themselves to the challenges triggered by this changing environment.

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