The Impact of the Coronavirus Outbreak on Mergers and Acquisitions
The coronavirus outbreak continues to impact all aspects of society and the economy. In a short period of time and on an unprecedented scale, consumer spending has been slashed, millions of workers have been furloughed and thousands of businesses have scaled back their operations.
Unsurprisingly, the M&A market is also dealing with the effects of the pandemic, and those operating in the sector are confronting a variety of challenges.
On many acquisitions, the impact of the COVID-19 outbreak on those who rely on debt to finance acquisitions cannot be overlooked, with the pandemic having influenced both their ability to use debt to fund deals, but also their capacity to satisfy financial and other covenants where debt may have already been used to fund a transaction.
Another consideration is the timing of the deal process itself, and both buyers and sellers should be ready to manage what is likely to be a longer-than-usual due diligence exercise. For example, given the ongoing lockdown, some sellers may find it difficult to provide access to certain documents or materials, whilst buyers might wish to consider expanding the scope of their investigations to focus on some of those areas that may be more likely to be affected by the pandemic, such as IT systems, compliance with employment laws and business continuity plans. In addition, as the pandemic continues to impact a variety of sectors in both the medium and longer terms, buyers and sellers should focus aspects of their due diligence on the possible effect of the virus on the target business, including, where relevant, appropriate mitigation and contingency plans. Particular considerations include;
- the ability of the target and its counterparties to perform their obligations under material contracts;
- any contractual rights or legal principles that may excuse non-compliance or allow contracts to be terminated by the target or its counterparties; and
- health issues, including the implementation of appropriate social distancing and other precautionary measures by the target.
More fundamentally, there is the obvious risk that the pandemic may jeopardise many businesses’ financial prospects and, in turn, the prospects of some deals concluding at all. For example, whilst a buyer may consider withdrawing from a deal if it appears that the target’s business is likely to suffer ongoing financial difficulties, the seller may want to push matters forward, regardless of the economic uncertainties.
Assuming that the parties are happy, in principle, to continue to negotiate the terms of the deal, it is likely that any discussions relating to the amount of the purchase price will be more protracted than usual, not least because the gap between the buyer’s and the seller’s valuations of the target may widen as the government enforced lockdown continues in one form or another.
As the deal process progresses, sellers should also consider the need for any coronavirus-related disclosures – against any material contracts warranties in the SPA, for example – and seek to ensure that such disclosures are as specific as possible to satisfy any requirement for “fair” disclosure in the SPA. Turning to another liability-related point, sellers are also be well advised to consider trying to include a general coronavirus-related exclusion of liability in the main transaction documents, whilst on the other hand, a buyer might try to secure a specific coronavirus-related indemnity in respect of known and identifiable area of risk.
At Keebles, our award-winning corporate team has a wealth of experience in the M&A sector and is continuing to provide clear, practical and commercially focussed advice. If you have any questions about the impact of the coronavirus outbreak on your business, please contact Rory Conwill at firstname.lastname@example.org or on 0114 252 1411.