COVID-19 and M&A: Key Insights

While COVID-19 has delayed some M&A deals, some dealmakers are plowing ahead. If you’re involved in negotiations now or contemplating a sale in the figure, here are the ways COVID-19 may change the process. 

Gap Controls 

Sellers sometimes agree to specific actions to protect the business before the transfer. Sellers often negotiate specific exceptions that enable them to act in the best interest of the business. Now, sellers need to carefully evaluate whether these exceptions extend enough protection. Conversely, buyers may want more oversight during the pandemic. Dealmakers should consider forming a joint committee including representatives from both sides who can collaborate about steps to protect the business. 

Completion Conditions 

Completion conditions that hinge on regulatory approval may take longer. Both parties should consider relaxing timelines. 

Foreign Direct Investment 

Companies weighing investments in EU-based businesses should be mindful of the Recent European Commission guidance urging vigilance about “attempts to acquire healthcare capacities” that might limit the supply of certain vital goods or health services. 

Considerations for Listed Companies 

Listed companies planning a merger should pay close attention to their share price. When the market is volatile, deal values decline. They may hit thresholds fore shareholder approval. Dropping share prices may erode a party’s ability to offer a substantive break fee should a transaction fail. 

Material Adverse Change

Material adverse change (MAC) clauses usually exclude widespread economic disasters that affect much of the market. So they will not typically allow buyers to withdraw from deals during the pandemic. However, newly negotiated deals may look to MAC clauses to protect buyers. These terms will be hotly contested, as both parties have a strong interest in favorable terms. 

Disclosures and Due Diligence

Buyers embarking on due diligence should dig deeply, and approach the process with fresh eyes. Some areas to pay close attention to include: 

• The financial effects of the pandemic, and how those effects might shift over the long-term. 
• How likely it is that a covenant breach may be triggered. 
• Whether the business has a strong disaster recovery plan. 
• How easily the business can adapt in a post-pandemic world. 
• The extent of the business’s insurance coverage, and whether it is likely to exclude COVID-19-related losses. 
• How supply chain swings might affect the business. 

Other Considerations

Some other dealmaking components that may change in the wake of the pandemic include: 

• representations and warranties 
• whether the effect of the virus must factor into business valuation 
• financing, and how it may affect prices and bidding environment 
• transaction insurance 
• the transition and separation plan 
• cultural integration if workers are still working from home 
• the practical realities of negotiating a transaction from a distance
• whether there are ways the business can better adapt to the crisis, generating more value
• the extent to which certain business, such as health companies, may benefit from the pandemic 

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