The effects of COVID-19 have led to a significant decrease in the value and volume of mergers and acquisitions across the world. The deal value in the first half of 2020 has an estimated reduction of 49% following a 22% drop from the year before.
Fortunately, the existence of virtual data room service providers has resolved this issue. After all, the implementation of lockdowns has prevented access to physical data room locations. With virtual data rooms, however, it’s become a lot easier to facilitate an M&A deals’ due diligence as potential buyers can access data securely via the cloud.
That aside, there have been a lot of changes in the M&A sector ever since the emergence of the pandemic. We’re going to explore those changes here. Let’s get started.
- M&A Deal Activity
There is no denying that merger and acquisition activities have dropped considerably because of the pandemic. By the end of March 2020, the M&A deal activity in the United States had dropped by more than 50% compared to that of 2019. This is expected as more companies redirect their focus and energy on things that will save their companies.
Most companies have foregone significant deals as they wait for the economy to stabilize. Additionally, the continued uncertainty brought about by the coronavirus has caused an increase in the valuation gap between buyers and sellers.
- Employee Retention
Another common impact of coronavirus is the retention of employees on merger and acquisition sector. However, a deficiency of employees, especially the key management personnel can have profound impact on operations in the future.
- Implications on Tax Insurance
The tax insurance market is less likely to be affected by COVID-19. This is largely because the risk profile of insured tax liabilities is less likely to increase than the risk of the current environment. This is also because of the nature of tax insurance policies.
- Impacts on Deal making and Terms
In the context of the pandemic, it is expected that buyers will have leverage when it comes to M&A deal making than sellers. Cash is key in the world of deal making and a slowdown will only mean that buyers will continue to have increased leverage.
Most buyers are adopting a “wait and see approach” where they maintain healthy cash reserves and continue to focus on their core business. Basically, buyers do a lot of scrutiny on target acquisitions to find those that have the right price. They may even decide to use the cash for other obligations.
Meanwhile, sellers are getting worried that they may not get full value on sales because of the increased analysis from buyers. However, there is a likelihood that sellers will continue to trail deal M&A terms that protect them. They expect buyers to evaluate the pandemic and its effects when they get into M&A agreements in the future.
Basically, merger and acquisition deals that have been signed are likely to progress. This is because there are a lot of legal difficulties involved when it comes to terminating such agreements.
On the other hand, unfinished deals that are still on the negotiating stage have a good chance of staying that way because of the uncertainty and the difficulty involved in purchase price calculation.
It is obvious that buyers want more visibility before committing to deals. This is where they determine whether to use the liquidity available to secure the existing business or for acquisition.
- Changes in Due Diligence Content
In the present environment, the content of due diligence is changing as buyers are turning their focus to determine how the pandemic can affect the target’s prospects and financial position. Although considered low risk during economic growth, matters like supply chain security, contractual agreements, employee sick leave arrangement, insurance policies and other issues have now become key considerations.
- Stricter Foreign Trade Laws
After the pandemic, the foreign trade laws may change and become stricter. It is expected that core industries will be transferred to the public sector a broader approach will replace is set to replace the shareholder value orientation. This means that there will be acquisition of companies with more corresponding factors than their counterparts.
- Consideration of the Current M&A Deals
When determining the impact of COVID-19 on merger and acquisition deals, it’s important to consider the current status of the deal. Parties at the preliminary documentation stage need to reconsider the timing in terms of due diligence dates, exclusivity offers, and timing of the offers.
In the case of a contemplated deal, buyers are highly recommended to recalculate the valuation before renegotiating the target’s purchase price. They also need to confirm whether the previous pricing and evaluation mechanisms are still valid and relevant. Besides, buyers may stop the negotiations if possible.
In the current crisis, it is already clear that certain changes and developments are anticipated in the mergers and acquisition sector. We are increasingly seeing a slow down or halt in negotiations as companies think twice before proceeding with the deals. This trend is likely to remain until economy has bounced back and businesses and consumers have more certainty.