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M&A continues as deal processes go remote

Posted on by Confiex Team

Last updated on June 23rd, 2023 at 12:17 pm

Covid19 pandemic crisis

The Covid19 pandemic crisis is having and will continue to have material impact on global mergers and acquisitions. In a very short time thousands of businesses have either cut back their operations or have shuttered down, millions of workers have been laid off or furloughed and supply chains have been disrupted.

There has been a spike in bankruptcies and restructurings and more are expected to come as the support packages begin to end in the near future. However, after the initial shock of the early lockdown, there has been a relatively quick return to near normal levels of mergers and acquisitions.

M&A

With new vaccines signalling a potential economic turnaround, attractive valuations, corporates that saw revenues soar during the lockdown period and identified opportunities to strengthen their supply chains and digital infrastructure returned to deals as also private equity firms sitting on a huge war chest of around USD 2.5 trillion, 2021 could serve as a catalyst for M&A deals.

Finding the right buyers or investors to approach a year ago wasn’t an overly difficult exercise. Now, it’s much more challenging because of the uncertainty pervasive in the market. Dealmakers are unsure which companies are actively pursuing M&A and whether once-active buyers are now focused on preserving cash. Previously, a company wishing to sell would have a list of, say, ten or twenty potential buyers to approach. Now, that number is significantly growing.

This time there has also been a sea change in the manner in which M&A transactions are developed and negotiated. With all of the principal players working remotely, the effective use of new and creative collaborative tools, technologies and techniques have become more critical as buyers, sellers, providers of M&A financing, and all of their respective legal and financial advisors adjust to the changed environment.

Deal times are expected to be significantly extended for both existing M&A deals that survive the pandemic and the new deals that are being entered into. Each stage of a typical transaction, including preliminary discussions between the parties, the negotiation of letter of intent or term sheet, the negotiation of a definitive acquisition agreement, and the pre-closing period, will likely take longer to accomplish. 

Due diligence

Due diligence will take longer, and new M&A due diligence issues will need to be addressed. Third-party consents (such as from landlords, customers, and intellectual property licensors) will take longer to obtain. There will be delays in obtaining any necessary antitrust or other regulatory approvals.

Buyers and their boards of directors are going to be much more cautious, and internal justifications for deal making in this environment will need to be more compelling agreement terms will take longer to negotiate as buyers will want to shift more closing risk and (where applicable) indemnity risk to sellers, and sellers will seek comfort that the persistence of the pandemic will not permit buyers to walk away from deals based on “buyer’s remorse.” Buyers will have serious concerns and apprehensions about their ability to properly value a seller in this environment. 

Buyers requiring financing will encounter delays from M&A lenders due to the unsettled state of debt markets and available liquidity. Moreover M&A lenders may seek closing conditions that are even more stringent than those sought by buyers, increasing closing risk for both buyers and sellers.

In light of the coronavirus pandemic, both the buyers and sellers alike are likely to refrain from entering into (or even negotiating) a traditional letter of intent until the buyer first has performed incremental due diligence on the degree to which COVID-19 has adversely affected the seller’s business, results of operations, financial condition, customers, suppliers, workforce, and business prospects. 

Invariably, when there is significant economic or other uncertainty in the world then the M&A deal making leverage shifts in favour of the buyers and away from sellers. Buyers and investors need to understand whether the drivers’ making companies distressed are short- or long-term in nature. Many companies rebound from restructuring and emerge more refocused. For others, COVID-19 has accelerated an inevitable decline. Proactively recognizing the need to restructure, collaborating with external firms and reducing costs early is critical to your success.

 

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Confiex Team

The Confiex team specializes in providing premium virtual data room solutions tailored for businesses. With their vast experience in working with document sharing platforms, they have been actively supporting the Virtual Data Room community since 2015 by offering valuable information to users free of charge.

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