India Employer Forum

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COVID-19 Impact On Mergers And Acquisitions

  • By: India Employer Forum
  • Date: 11 August 2020

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The number of coronavirus cases globally has crossed the 20 million threshold. Since the pandemic started, the economy of the world has recorded the largest global recession in history. Despite the economic crisis, many financial experts say the effects of COVID-19 can still become worse than it is already. In India, the pandemic has caused untold hardship to businesses. As a consequence, just as the business world is reacting to the pandemic, experts believe the mergers and acquisitions landscape will be no different. They expect there will be certain fundamental changes.

Although the world of mergers and acquisitions has endured and recovered from past economic downturns, this time is different. In times of financial and economic crises, the accompanying uncertainties that occur in the business and capital markets force buyers to cut back on their acquisition plans. However, the economic crises induced by COVID-19 are different. Its impact on the mergers and acquisitions environment transcends the financial system and the attitude of players within the industry.

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COVID-19 and on-going transactions – What to expect?

Mergers and acquisitions during COVID-19 have become a challenge in India. Due to many uncertainties surrounding the future of businesses, corporates are caught in-between completing on-going deals or putting an end to them. The key drivers of decision making include a change in business outlook, concerns regarding valuation, liquidity crunch due to reduced lending by banks, and consequent reallocation of surplus funds. Cross-border transactions have been impacted severely due to the lockdown and closure of international borders.

In deciding on whether or not they should move on with pre-existing consolidation of companies deals, enterprises will consider the business sector. This is because the pandemic didn’t have a uniform effect on every area of business. In areas such as aviation, hospitality, and tourism, the pandemic had a direct hit. It is however highly unlikely that on-going corporate mergers and acquisitions deals will continue in these sectors.

In other sectors such as consumer goods, manufacturing, etc., where the impact is less severe, buyers may reconsider valuations or seek downward price adjustments. This becomes particularly relevant, given that January 2020 saw the Indian stock markets at an all-time high and buyers may wish to reconsider valuations.

The result of this could see buyers invoke the Material Adverse Effect (MAE) clause in their mergers and acquisitions agreements. Under corporate mergers and acquisitions, the term Material Adverse Effect is a materiality threshold used to measure the negative effects of some events on the target business. It is considered a significantly high threshold and its definition in an acquisition agreement often covers many different events. Essentially, the MAE gives buyers the right to walk away from transactions.

Nevertheless, the scope of definition and the accompanying exclusions of the MAE clause depends on the nature of the transaction, industry, and negotiating power among the parties involved. Based on this, it will require a case by case assessment to determine whether or not the coronavirus pandemic has resulted in an MAE. Even where an epidemic, pandemic, or health emergency are not specifically excluded, other exclusions (e.g. events having an industry-wide impact, general economic conditions, change in law, or force majeure) could potentially exclude the application of the MAE clause to the present crisis.

Mergers and acquisitions deals during the coronavirus pandemic

Since the pandemic started, every activity has experienced a downward trend. Just recently, things have started to slowly pick up because several countries are relaxing their lockdown protocols amid recording fewer cases of infections. COVID-19 has affected mergers and acquisitions activities in India, just like it has affected every other area of business. 

Some of the consequences anticipated as a result of this are listed below:

Delays and dropouts: Due to the economic crisis ignited by the pandemic, the world of business faces very uncertain times going forward. Businesses that didn’t suffer much during the pandemic might begin to see a change in fortunes with time. In essence, it is hard to predict what will happen. That is why any mergers and acquisitions deals still at the structuring stage are likely to get shifted to a later date, preferably to a time when the crisis passes. Also, seller driven bid processes are likely to see bidders drop-out.

De-globalization: Since the pandemic is a worldwide catastrophe, every nation is dealing with its consequences. As it affects India, so does it affect other countries, albeit in a disproportionate manner. The interdependence of industries across the board now serves as a disadvantage during this period, especially in manufacturing. In terms of mergers and acquisitions, it’s unexpected that multinational companies and private equity firms will be willing to make cross-border investments. Because they are likely to conserve cash in this uncertain market and become increasingly inward-looking.

Opportunities: Despite the depressing nature of things, the coronavirus pandemic has shown the resolve of human beings to survive no matter the situation. So, in as much as everything looks bleak, there are some opportunities within sight for corporate mergers and acquisitions. Enterprises can leverage the lower valuations in the short term for the benefit of a higher return on capital in the future. A similar trend was observed post the 2008 recession, where PE funds and MNCs with sufficient “dry powder” deployed their funds to pick up stressed assets on the cheap in the aftermath of the crisis.

Stimulants and catalysts: Enterprises have looked to improve their business models to cope with the difficulties of the pandemic. But they cannot come out of this crisis unscathed without help. As a result, the government has put in financial stimulus packages to help ease the burden on businesses. These stimulus packages, which include measures such as tax relaxations could be the catalyst that eases the process of mergers and acquisitions.

Due diligence: The pandemic has brought a wave of change to the way most things are done. In terms of mergers and acquisitions, the process of due diligence will undergo some changes. Physical meetings and site visits will become less preferred as things such as virtual data rooms, inter alia, consequences of the target’s failure to perform its obligations under crucial contracts will receive more focus.

References:

  • Material Adverse Effect | Thomson Reuters
  • The impact of the coronavirus crisis on mergers and acquisitions | Richard Harroch |April 17, 2020
  • COVID-19 and M&A in India: Navigating risks and understanding opportunities by Ramgovind Kuruppath|April 16, 2020

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