- March 15, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Coronavirus Impact On Mergers And Acquisitions
Coronavirus impact on Mergers and Acquisitions and other strategic corporate transactions brings both business and legal implications:
Historically, business and capital market obscurity has led buyers to scale back their vital programs. In an atmosphere where mid- and perhaps long-term economic performance and prognostications are doubtful, ascertaining a sound, stable business model for a deal may be challenging, if not improbable. Therefore, we would presume many acquirer boards to choose a wait-and-see strategy for notable potential transactions.
That said, the prolonged bull market soon ending had generated a situation in which several strategic acquirers had become uncomfortable with target valuation expectations. For buyers with sufficient cash on hand, the business disruption may point to targets significantly decreasing their perceptions regarding a take-out price, driving to likely value convergence if the strategic value of a deal is apparent and satisfied enough to the buyer notwithstanding the environmental disruption. Besides, the “dual-track” peril of a near-term IPO for late-stage private businesses, an oft-encountered feature of the recent deal landscape, has possibly declined.
Besides, the vital and abrupt decline in market values may influence some companies to examine sales, including as a consequence of opportunistic shareholder activism and financial stresses. In the collapses of 2001-02 and 2008-09, especially in the technology businesses, there was a definite trend that “the strong got stronger,” in some cases through assured and well-executed acquisition approaches. Conversely, weak companies should equip for potential activism by evaluating their takeover defenses, gathering a team of qualified advisors, and staying near to essential shareholders.
For deals concerning private company targets, the dubious business prospect may drive parties to examine earnout structures where the risks of future performance assigned between buyers and sellers. Earnouts, of course, come with their multitude of problems, from negotiation complexities to massive potential for conflicts over whether milestones were, and were able to be, accomplished.
Evaluating Target Companies/Enhanced Due Diligence Focus Areas
In these ambiguous circumstances, the necessity to conduct reasonable, thorough diligence becomes eminent. Buyers should concentrate on the influence of coronavirus on a company’s workforce and its capacity to operate remotely, supply chain, go-to-market strategy, capital expenses, financial position, the capability to service debt and additional fixed commitments, the vitality and economic health of customers, the capacity to check operating costs, the location and state of facilities, the terms of crucial contracts including the termination rights of every party, regulatory and legal compliance disclosure and other critical company-specific risk factors. It will be especially tricky in the near term to evaluate “worst-case” scenarios.
For buyers employing third-party financing, there may be vital challenges coming to terms with lenders given an evolving landscape as to market cycles, financial covenants, and closing conditions. Banks will have related diligence concerns as buyers about the target but will probably be further risk-averse and may extend their diligence on the buyer as well. Buyers should warrant MAE closing conditions in their funding documents and with their acquisition contracts.
MAE and Additional Transaction Terms
- As buyers and sellers attempt to allocate the risks connected with the forces of the coronavirus on the target business and, more broadly, the global industry and markets, deal terms in acquisition contracts need to get studied.
- In negotiating the interpretation of Material Adverse Effect (MAE), which is the foundation for a standard closing condition enabling buyers to annul a deal if the target company suffers an MAE, targets may try to incorporate “pandemics” as omissions to the description of MAE. Buyers should be careful that admitting such limitations have the consequence of allocating the risks of the coronavirus to the acquirer as it would get bound to consummate the deal even if the target company’s business has materially declined following the signing of the agreement. It will be tough for buyers to negotiate for a total walkaway right relating to coronavirus. However, buyers should recognize checking any such exception for conditions where impairment to the target company is not disproportionate to others in similar industries, or given the nature of the pandemic, in the corresponding geography.
- Even if buyers don’t attempt to append or modify closing conditions given coronavirus concerns, they may try to reallocate some of the risks back to sellers by demanding specific indemnity provisions. Buyers can negotiate for individual indemnity if they can recognize distinct potential liabilities that a target company may encounter due to potential coronavirus impacts. These consequences include potential obligations arising from workforce accommodation costs, supply chain disruptions, or contract terminations.
- Parties negotiating agreements that require regulatory approval may additionally take into account potential delays, which could be vital, as governmental agencies may suffer temporary shutdowns or restricted operations as a result of the coronavirus. Parties should contemplate whether the “outside date” for a transaction should get lengthened if the governmental agencies accountable for the deal approvals may not be able to operate on regular timelines.
- Target businesses should be subject to interim operating covenants. These covenants would limit a target company’s capacity to work outside of the regular course of business and introduce explicit limitations against workforce reductions, material changes to personnel procedures, variations in compensation or benefits, and similar actions, in each circumstance without the buyer’s permission. While there is typically an exclusion for actions taken in agreement with appropriate laws, sellers should reexamine the covenants with their counsel to assure that it is seeking buyer consent before exercising measures in response to public health guidance or otherwise.