Navigating the impact of COVID-19
How to manage M&A risk
The COVID-19 pandemic brought an abrupt end to the global M&A bull market, with deal volumes and values in Q1 and Q2 2020 plummeting amidst an unprecedented level of macroeconomic uncertainty.
It is clear that M&A post-COVID will take different forms, shapes and speed. Deal structuring today requires new approaches to deal with insecurity of business prospects, restructuring requirements and financial pressures. At the same time, financial investors still retain record amounts of dry powder, strategic investors are looking to secure their supply chain and make opportunistic acquisitions and there are opportunities for increased M&A activity both in distressed scenarios and in critical industries such as tech, pharma, healthcare and medical devices.
Here are just some of the issues that we expect to address in M&A deals in the coming months:
- Challenges with valuation and inadequacy of historic financials will lead to consideration of mechanisms to bridge the expectation gap – earn-outs, vendor finance and deferred consideration amongst others
- There will be increased public and regulatory scrutiny of deals involving critical industries (and industries supported by COVID-19 state aid), requiring longer or more flexible longstop dates
- Pre-closing covenants will require flexibility for the seller to deal with COVID-19 related uncertainties, to be balanced with the buyer’s desire for value preservation
- Buyers will focus their due diligence on the target’s ability to continue its operations and the response to COVID-19 (much depends on the target’s sector and its operational and international set-up, including whether it benefitted from government support)
- Buyers will also seek enhanced protection against downside risk - for example tailored financial performance conditions, an expansion of the representations and warranties catalogue
- Warranty and indemnity insurance, which was already on the increase before the pandemic, will continue to be an important component of M&A deals, with insurers now showing more flexibility around COVID-19 related risks
- Parties will explore more creative and innovative forms of M&A, such as JVs/strategic collaborations, PIPEs, close M&A and option deals
Our quarterly M&A monitor (linked below) updates you on the changing landscape globally, and we also provide insights in our other briefings and blogs linked below. Please get in touch with your usual contact to discuss the issues you are facing.
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If you would like to discuss these issues in more detail, please speak to your usual Freshfields contact or one of the lawyers listed below who can direct your query.