Public M&A : A Commercial Update

By Lola Stirling


The COVID-19 crisis has undeniably impacted the legal sector and we are yet to see its full effect on the industry. The pairing of uncertainty in global markets and the instability of firms and companies have produced a tumultuous environment for deals to take place in. This article will analyse the effects of the pandemic on this sector, both where the pandemic has caused a downturn in deals and where it surprisingly hasn’t.


THE DECREASED VOLUME OF DEALS


The volume of M&A deals has severely decreased as a result of the pandemic. Over US$10 billion worth of mergers, acquisitions and investments were terminated in the first week of May alone. This impact has been illustrated in the historically low number of firm offers for the first half of the year, the number being 12 compared to 2019’s 33. Perhaps, the highest profile terminated M&A deal concerns Boeing Co. and Embraer SA. The former terminated a $4.2 billion deal to acquire 80% of the latter’s business. This comes after Avalon cancelled an $8.4 billion order of Boeing’s 737 Max jets due to the sharp reduction of global air traffic.


THE DECREASED VALUE OF DEALS


Not only has the volume of M&A deals decreased so have deal values. In comparison to the first quarter of 2019, M&A deal values were down 50+% in the first quarter of 2020. A survey conducted on behalf of Pinsent Masons has revealed that the valuation of 64% of companies involved in a deal during the pandemic fell. Patrick Sarch (partner at White & Case LLP), has stated that due to the sharp decline in global stock markets followed by fast rebounds sparks concern amongst analysts concerning mispricing.


FACTORS AFFECTING THE EXECUTION OF DEALS:

  • Uncertainty

Due to current uncertainty, businesses are apprehensive and playing a waiting game to assess market instability before pricing a deal. Some markets have boomed, such as tech, pharma and media, whereas others such as aviation and retail have been hit hard, making providing an acceptable price difficult. The majority of deals/potential deals have also been put on hold or under review for businesses to assess issues and gain an idea of what the landscape will look like before re- engaging in M&A transactions.

  • Lack of available financing

Furthermore, the lack of available financing is preventing deals from moving forward, more and more companies are looking for external financing solutions due to issues with cash flow. Traditional lenders are being occupied by existing lending arrangements and liquidity demands and have limited scope to consider and honour new acquisition finance requests.

  • Remote working

Remote working is our current reality and there is a question of how many deals can be completed remotely. During the merger process, meetings are key to developing rapport which is more difficult to establish virtually/remotely. The need to build rapport in M&A deals cannot be overstated as it is crucial to navigating through the deal’s early stages and ensuring that it moves forward.


THE POSITIVE EFFECTS OF THE PANDEMIC AND WHAT WE CAN EXPECT IN THE FUTURE:


Despite the pandemic putting many deals on hold and shaking up the industry, the effects are not purely negative:

  • The valuations of 27% of companies rose (according to the aforementioned Pinsent Masons survey).

  • We will see a boost in M&A deals in tech sectors, e-industries and cybersecurity.

  • Lower stock prices will incite more hostile takeover attempts.

  • Strong companies are moving to exploit the current climate, e.g. Verizon is acquiring BlueJeans Network to grow its 5G tech.

  • We will see a boost in companies using their Material Adverse Change (MAC) clauses, these allow companies to withdraw from deals due to a substantial deterioration of the target company’s assets between signing and closing.

  • The due diligence phase of a transaction will become more important than ever to avoid risks.

  • Virtual meetings, encryption of documents and electronic signatures will be relied upon, meaning that encryption and good cybersecurity will be more important than ever.

Understanding M&A is essential for anyone considering a career in corporate law. Being able to discuss the current climate as well as being able to predict future changes will impress in interviews for vacation schemes and training contracts.

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