Post COVID-19 Deal Landscape Changes: Starting an M&A Deal?
While the deal market may have slowed, business leaders, commentators, business owners and investors expect that deals will start again (albeit perhaps not in earnest until Q4 this year) and indeed need to start again as M&A is a powerful driver of the economy and innovation.
So what, if any, changes to the early aspects of deal landscape might we expect to see? I propose some thoughts below on what Covid-19 may mean for the parties in the early stages of a deal:
- NDA/Letters of Intent: I can envisage NDAs being more focussed on exclusivity and circumstances in which exclusivity can be ended, as there will be more intense competition for quality businesses and buyers. I would anticipate that we may become used to more detailed, longer and more negotiated letters of intent so that issues are flushed out before parties are too far in to a process. While many advisors have a bugbear of negotiating the SPA in the letter of intent, I can see more details as to parties' expectations being raised up front.
- Due Diligence: I would expect to see a longer due diligence process, and more of it and legal and tax diligence particularly to be more closely scrutinised. I think we may see an increase in commercial diligence and strategic diligence (what will the impact of lockdown and changes to the way a business works be in each sector) and that to be used as a pricing negotiation tool.
- Financial due diligence: will be more protracted as advisers argue more than usual about what is “normalised”, and for each business when did the Covid-19 impact start and the weighting or discount to be applied to the figures to be argued over fiercely
- Tax due diligence: there is likely to be more consideration of grants and support that businesses have taken during Covid-19, and debates about whether criteria were met and the possibility of repayment of monies or disqualification of claims, leading to a new breed of specific tax warranties and indemnities to cover those issues.
- Price: agreeing a price for a business and the structure of consideration in transactions is likely to alter. I expect larger earn-outs may be offered to try to bridge the value gap in expectation on pricing between sellers and buyers and to try to reflect the fact that no one really knows how a business may recover and respond in this market. Against that, some buyers might want the certainty of a fixed price regardless, which will lead to discussions around discounts on value for the certainty of cash. I can also envisage some sectors and businesses arguing for anti-embarrassment clauses over a period of a few years given the uncertainty of performance in the future vs value realised today.
One thing is for certain, as with much of the business world, the M&A and deal market will have to adapt to the circumstances. I do not expect a deal process to remain exactly as it was; although it will remain very familiar to advisers, it will undoubtedly be different.
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