The novel coronavirus (COVID-19) pandemic continues to have a global impact on mergers and acquisitions (M&As) at a massive scale. About hundreds and thousands of businesses have reduced their operations significantly, and millions of employees have been laid off.
It’s not the first time something like this has occurred; the M&A world has endured and recovered from past economic crises like the Great recession from 2007 to 2009 in the United States.
Things are different this time; businesses are experiencing a massive impact on the financial aspect, including other factors like due diligence, pricing, availability, deal financing, third-party approvals, etc.
The pandemic has been devastating for some organizations like the SoftBank Group Corp terminated tender offer for up to $3 billion worth of a share of WeWork.
The Reliance Group company converted huge investments from giants like Facebook, Vista, and likewise.
What’s next?
Several corporate and financial intermediaries are using different approaches to re-shape the procedures and technicalities involved in M&A deals.
In this blog, we will highlight and analyze the components to help your organisation thrive in this changing environment.
1. Due Diligence activity issues
It’s an essential activity for a buyer to verify information about the seller like compliance, contract, finances, etc. of the company. This activity helps to examine the risks associated with the legal and financial problems of the target company.
Let us take you to a few crucial areas that you need to consider in your due diligence:
- Due to travel restrictions and work from home (WFH) policies, physical visits are just impossible. This poses as a hindrance for smooth inspection and consultation. The seller company needs to design a protected mechanism and system to get access to all the data remotely.
- The owner or acquirer has to fulfil the contractual obligations related to mergers and acquisitions asked by the target company. Along with the legal contracts, the acquirer has to focus on Force Majeure clauses that may enable your counterpart to terminate the agreement.
- Acquirers can analyse the revised financial projections to understand the degree the change in the projections and know how to achieve new points considering the current market scenario.
- It’s essential to identify the key employees and management personnel to have a balanced team. This way company’s business decisions aren’t hampered even during this pandemic.
- The acquirer will scrutinise whether the target company qualifies as an MSME (Micro, Small, and Medium Enterprises). You’re eligible to take advantage of collateral-free loans given by the Centre and moratoriums.
- Thorough research of customers’ portfolio, including the debtors and the risks associated with the recovery of receivables, is mandatory.
- The designated acquirer should also consider the compliance business continuity plan, crisis management procedures and safety measures of employees at the workplace.
These are some of the due diligence issues that can impact the relative bargaining power involved in an agreement. Try to resolve it using the above considerations.
2. Finance and liquidity
Several industries are facing a drastic decline in revenues and sales. Thus, deals will compete with other corporate priorities for money even if their capital is higher than in previous downturns.
Insurance settlements given by the government will offer financial aid to the organisation, although there are more instances of companies choosing their credit cards to get access to cash. Even sellers are offering financial help to provide capital.
Various other factors include:
- Credit agreement provisions – Many companies are using existing covenants and reporting deadlines to know if they can adjust for COVID-19 impacts.
Make sure you go through the potential exclusions for items that were not considered previously. It’s essential to find alternatives that can help in anticipating potential areas.
- Cost considerations – Your company might be facing several unusual non-recurring expenses like inventory loss, sanitisation, closed facilities, new employee training, marketing campaigns, etc.
These unexpected expenses can impact the company’s position and budget. The need of the hour is to use tools like deal modelling on current transactions.
- Headroom analysis – As your organisation’s undrawn borrowing capacity becomes critical, it’s essential to examine headroom in covenants closely.
You may need to recalculate previous forecast scenarios. Timely identification and tracking adjustments can lead to renegotiating covenants or signing new credit agreements.
3. Funds for acquisitions
Coronavirus has made mergers and acquisitions difficult and challenging for lenders to provide financing. With many businesses facing cash crunches, there’s a high risk of a loan getting converted into an NPA (Non-performing asset).
Now there’s a need for additional security or terms the lender might want to impose to make sure that the advance doesn’t go wrong.
You need to remember that the negotiations with lenders and the production of extra documents that can be exhausting.
Considering all this, the seller should be prepared for all kinds of delays as the buyer’s liquidity issues can affect the deal significantly.
It would be great to finance buyouts with debts.
4. Negotiations, term sheets and letter of intent
The pandemic has hampered due diligence activity, causing deviation from the usual cause of predefined terms and negotiations.
Currently, buyers will feel justified in going forward with any negotiations after completing the incremental ground level due diligence and related market status.
This period varies depending on the seller company’s compliance history and financial portfolio.
During negotiations, the buyer would include the scope of Material Adverse Effect (MAE) in the closing conditions, stringent pre-closing covenants and drop-dead dates.
In the worst scenario, the seller can terminate the period of exclusivity in case of any indication about the transaction having no future.
5. Regulatory Approvals
As all the workers will be working remotely, paper fillings are discouraged or prohibited in some cases. This has disrupted the ordinary procedures for reviewing and approving transactions.
To survive in this industry, it’s pivotal to make continued changes in procedures and dealmaking for sellers, buyers and financial advisors.
Currently, the Indian government hasn’t implemented any changes to the statutory timelines under the Indian anti-trust regulations (Competition Commission of India or ‘CCI’). They have introduced a new e-filing system for merger control filings. The CCI has made pre-filing consultations mandatory to reduce the number of delays in considering and approving combinations due to ‘work from home requirements’ and less workforce.
However, the CCI has arranged for competitors that are necessary and proportionate to address concerns arising from Covid-19. To cooperate with your competitors, you might need detailed documentation and ex-ante review by legal counsel.
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Their guidelines include:
(i) limiting production, services or technical development
(ii) excessive pricing
(iii) bundling non-essential products/services with essential services.
Rakesh Narula & Co. has been a part of several business transactions for providing an independent opinion on the fairness of the pricing for several deals across sectors.
Trust us for valuation for mergers and acquisitions, and more!