The Covid-19 crisis has had and continues to have a significant worldwide
impact on mergers and acquisitions . Hundreds of thousands of firms have closed
or curtailed their operations dramatically, millions of people have been laid
off or dismissed, consumer spending has been drastically decreased, supply
networks have been impacted, and demand for oil and other energy sources has
The M&A segment has survived and recovered from previous recessions. But the
circumstances are different this time. The pandemic's influence extends beyond
the financial system in general, seller valuations, and buyer enthusiasm for
short-term agreements, to a variety of different factors that influence M&A
Which include deal terms, new due diligence problems that have developed, how
due diligence is handled, the availability, price, and other aspects of project
funding, and the time it will take to gain essential regulatory and other
third-party approvals for operations.
In this article, I will clarify how the mentioned factors, as well as others,
have already impacted M&A dealmaking and will likely be influencing the M&A
realm for some time yet to come, as well as how both parties can each adjust to
the changed circumstances to help lessen their exposure to the business risk
arising from the pandemic.
Timing and Delay in M&A Transactions:
Deal deadlines are projected to be greatly delayed for both current M&A
transactions that survive the epidemic and new acquisitions engaged during the
pandemic. Each stage of a typical transaction will likely take longer to
complete, including preliminary conversations between the parties, the
negotiation of a letter of intent or term sheet, the negotiation of a formal
acquisition agreement, and the pre-closing period.
These delays will be caused by several pandemic-related variables, including
all the following:
- Due diligence will take much longer, and there will be additional M&A
due diligence challenges to solve.
- Buyers and their board members will be considerably more cautious, and
internal explanations for dealmaking will need to be more persuasive in this
- Buyers will wish to shift greater closure risk and (where appropriate)
indemnification risk to sellers, while sellers will seek assurance that the
pandemic's tenacity would not let buyers walk away from purchases due to
Debt financing availability and arrangements for acquisition funds:
Historically, debt has been used to finance a major portion of M&A transactions,
particularly in the private equity area. The coronavirus crisis' volatility in
the financing markets has created hurdles for deals that rely on third-party
debt financing, including a significant level of uncertainty regarding the
availability and conditions of such debt financing.
The following are the new financing-related questions and problems that
purchasers and borrowers will face:
- What duties would purchasers have if they are unable to conclude a
contract due to illiquid debt markets and lenders' inability to lend, and
what remedies will sellers have in this situation?
- What further due diligence would a lender require, and how long will
- Will lenders raise their price in response to the risks of the
coronavirus outbreak and demand for stricter financial covenants, raising
the likelihood of future default events?
The Impact on Dealmaking and Deal Conditions:
When there is substantial economic or other uncertainty in the area of M&A
dealmaking, leverage always moves toward buyers rather than sellers. There's no
reason to think it'll be any different this time, given the covid-19 outbreak.
While strategic and private equity purchasers have their own commercial and
operational issues, many remain "money-rich" and can typically afford to wait
for the appropriate acquisition targets at the right cost.
New Due Diligence Problems in M&A:
Acquirers are conducting extensive additional due diligence to determine the
impact of the covid-19 epidemic on the seller's company.
The following are examples of expanded due diligence problems:
- Are the new financial estimates provided by the seller realistic and
- Has the seller followed central and state rules regarding layoffs and
- How has the coronavirus impacted the seller's workforce? Is the seller's
workplace and third-party suppliers sufficient to sustain its operations?
The Effect on Letters of Intent:
Letters of intent, term sheets, memorandums of understanding, and other similar
documents are widespread in the M&A environment. I anticipate that in light of
the covid-19 pandemic, both buyers and sellers would hold off on signing (or
even negotiating) a conventional letter of intent until the buyer has first
carried out additional due diligence on the extent to which covid-19 has
negatively impacted the seller's business, results of operations, financial
position, clients, suppliers, personnel, and commercial prospects.
The length of this incremental due diligence period will be determined by the
seller's conditions and the parties' respective negotiating strength. A
purchaser might anticipate the seller pushing aggressively for a limited time
while rejecting subsequent dominance.
Unlike in previous crises that affected M&A agreements and activities, there has
been a significant shift in the way M&A transactions are established and
negotiated this time. With all of the key participants working remotely, the
efficient use of innovative and creative collaboration tools, technology, and
procedures has become more important as buyers, sellers, M&A finance providers,
and their respective legal and financial advisers adjust to the new environment.
Moreover, Human species is the perfect example of evolution. We evolve every day
and so does the way we deal. Needless to say, I think that everyone will adapt
to this change in work environment and all will seem normal at the end of the
day. I agree that every crisis and pandemic brings their fair share of problems
but smart business operators manage to overcome all these difficulties.
Written By: Shivam Narwal.
I am a 5th year law student at Chandigarh
University pursuing BBA LLB(Hons).
My primary areas of interest include corporate and commercial law, taxation,
mergers and acquisitions, arbitration, and international trade law. Aside from
academic interests, I enjoy writing and researching new issues related to law
and presenting them in a simple format.