While the private Mergers & Acquisitions market has remained strong despite the pandemic, COVID-19 has been affecting this sector in many different ways. Set out below are answers to questions we frequently hear from clients in the M&A market.
What changes have happened to due diligence investigations?
Most obviously, due to Covid restrictions such as social distancing and travel restrictions, some logistical aspects of the due diligence process have had to be reconsidered. However, this has often been more of an issue for a buyer than the buyer’s professional advisers. Buyers will want to meet a target and get a feel for the business and its key people. Their advisers, however, can largely carry out their due diligence investigation remotely and the Covid restrictions have had little impact on what was already a process undertaken through virtual data rooms.
A more difficult issue has been understanding the impact of the pandemic on the underlying business of a target. This is often a judgement call on the part of the buyer as is the future performance of the target.
Buyers are, however, looking at what steps targets have taken and how well they are set up to deal with ongoing restrictions and future similar situations.
How do you build in price or valuation protections?
Buyers have often used pricing structures that involve a post-completion price adjustment or elements of contingent (deferred) consideration. This has been exaggerated throughout the pandemic, to make sure that the economic effects of the pandemic on the target business will be adequately reflected in the price. This covers both strong businesses that have suffered but also those that may have had a sharp rise in profitability that may not be sustainable in a normal environment.
Where earn-outs are used, we are seeing some that are more complex and longer than normal, to reflect the ongoing uncertainty in the economy.
Has there been an impact on legal documents?
Generally, not, save for some more detailed provisions around price payments and adjustments.
Parties are also less likely to want a split exchange and completion (where there is a delay between signing and completing), to avoid any further uncertainty. Generally, we are seeing split exchanges only where there is third party consent (such as regulatory consent) required.
Where there is a split exchange, it is important to make sure that the agreement has appropriate provisions such as a material adverse change (MAC) clause. MAC clauses enable the buyer to withdraw from the deal in the event of a significant adverse change that affects the target business in the interval between exchange and completion.
Does the acquisition take longer?
Finding a target and initiating the start of the conversation probably does take a little longer but once the parties are at the Heads of Terms stage, there is no real evidence that the deals are taking any longer.
Is there any change in the acquisition structure?
There is nothing to indicate the usual choice between an assets acquisition and a share acquisition has been affected.
However, we are seeing some more transactions where there isn’t a complete takeover. Included in these are:
· partial acquisitions rather than acquiring the entire share capital, sometimes with an option to purchase the balance
· investing in alternative forms of capital such as convertible loan notes and convertible preference shares which give a right to acquire shares in the future
· strategic partnerships or joint ventures.
If you have questions or need assistance with M&A transactions, we would be delighted to hear from you.